<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-40339
PROSPECTUS
2,300,000 Shares
[LOGO OF SYMPHONIX]
COMMON STOCK
---------------------
All of the 2,300,000 shares of Common Stock, $0.001 par value per share (the
"Common Stock"), offered hereby are being sold by Symphonix Devices, Inc.
("Symphonix" or the "Company"). Prior to this offering, there has been no
public market for the Common Stock of the Company. See "Underwriting" for a
discussion of the factors considered in determining the initial public
offering price. The Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "SMPX."
---------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................ $12.00 $0.84 $11.16
Total(3)................................. $27,600,000 $1,932,000 $25,668,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
to be $800,000.
(3) The Company has granted the Underwriters an option, exercisable within 30
days after the date hereof, to purchase an aggregate of up to 345,000
additional shares at the Price to Public less Underwriting Discounts and
Commissions to cover over-allotments, if any. If all such additional
shares are purchased, the total Price to Public, Underwriting Discounts
and Commissions and Proceeds to Company will be $31,740,000, $2,221,800
and $29,518,200, respectively. See "Underwriting."
---------------------
The Common Stock is offered by the several Underwriters named herein when,
as and if received and accepted by them, subject to their right to reject
orders in whole or in part and subject to certain other conditions. It is
expected that delivery of certificates for the shares will be made at the
offices of Cowen & Company, New York, New York on or about February 19, 1998.
---------------------
COWEN & COMPANY UBS SECURITIES
February 13, 1998
<PAGE>
The Company's family of products under development, vibrant soundbridges, are
designed to work in the middle ear.
[Illustration of Vibrant soundbridge in place and illustration of Floating
Mass Transducer in middle ear]
The Floating Mass Transducer (FMT) is attached to one ossicle.
The patented FMT, Symphonix's core technology, mimics and amplifies the
movement of the ear's vibratory structure.
The Company's implantable hearing devices have not been approved for
marketing by the United States Food and Drug Administration or any
international regulatory authorities.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER ALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
Vibrant and Symphonix are registered trademarks and Floating Mass
Transducer, FMT, Vibrating Ossicular Prosthesis, VORP and Audio Processor are
trademarks of Symphonix Devices, Inc.
2
<PAGE>
The external audio processor is magnetically held in place behind the ear and
covered by the user's hair.
[PHOTOGRAPH OF MAN WITH AUDIO PROCESSOR IN PLACE]
The Vibrant TI, a totally implantable soundbridge with no external components,
is in the early stages of development. The product is designed to incorporate
the Company's proprietary microphone technology.
[PHOTOGRAPH OF VIBRANT TI MODEL]
[Symphonix Logo Appears Here]
[PHOTOGRAPH OF THE VIBRANT P, WITH PROGRAMMING UNIT]
The Vibrant P, a second generation programmable soundbridge (pictured above),
is currently being implanted in clinical trials in Europe. The Vibrant D, a
third generation programmable digital soundbridge, is under development.
Hearing Management
The first generation Vibrant soundbridge is currently being implanted in
clinical trials in the United States and Europe.
[PHOTOGRAPH OF VIBRANT SOUNDBRIDGE]
The Company's implantable hearing devices
have not been approved for marketing by
the United States Food and Drug Adminis-
tration or any international regulatory
authorities.
Vibrant and Symphonix are registered trademarks and Floating Mass Transducer,
FMT, Vibrating Ossicular Prosthesis, VORP and Audio Processor are trademarks of
Symphonix Devices, Inc.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. Except as set forth in the Consolidated
Financial Statements or as otherwise indicated herein, information in this
Prospectus gives effect to (i) the reincorporation of the Company from
California to Delaware effected in January 1998, (ii) the one-for-1.376 reverse
split of the outstanding Common Stock effected in January 1998 and (iii) the
conversion of all outstanding shares of Preferred Stock into shares of Common
Stock, which will occur automatically upon the closing of this offering, and
assumes that the Underwriters' over-allotment option is not exercised. See
"Certain Transactions," "Description of Capital Stock" and "Underwriting." This
Prospectus contains certain statements of a forward-looking nature relating to
future events or the future financial performance of the Company. Prospective
investors are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating such statements,
prospective investors should specifically consider the various factors
identified in this Prospectus, including the matters set forth under the
caption "Risk Factors," which would cause actual results to differ materially
from those indicated by such forward-looking statements.
THE COMPANY
Symphonix is a developer of proprietary semi-implantable and implantable
products, or soundbridges, for the management of moderate to severe hearing
impairment. In 1994, mild to severe hearing impairment affected approximately
26 million people in the United States, or 10% of the population, of whom
approximately 17 million people were classified as moderately or severely
hearing impaired. The Company believes that its family of Vibrant soundbridges,
designed to overcome the inherent limitations of traditional hearing devices,
represent a novel approach in the management of hearing impairment. The
Company's initial product under development, the Vibrant soundbridge, is a
semi-implantable device which mechanically drives the three small bones of the
middle ear to overcome the user's hearing impairment. The Company's second
generation product, the Vibrant P programmable soundbridge, provides a greater
degree of customization to address the specific needs of a particular user's
hearing loss and expands the types of hearing loss that can be managed by the
Company's products.
The Vibrant soundbridge is designed for the management of moderate to severe
sensorineural hearing impairment. Sensorineural hearing impairment accounts for
the vast majority of adults who are hearing impaired and occurs typically as a
result of aging or exposure to loud noise over a protracted period of time. The
traditional approach to the management of mild to severe sensorineural hearing
impairment has been the use of hearing aids, which were first introduced a
hundred years ago. Hearing aids are acoustic drive devices that amplify sound
to increase the movement of the ear drum, thereby indirectly vibrating the
bones of the middle ear in an attempt to overcome the decreased sensitivity of
the delicate sensory hair cells of the inner ear. Although there have been
continued advancements in hearing aid technology, for optimal performance, all
or part of the device must fit tightly in the ear canal which results in
significant drawbacks, including distorted sound quality, acoustic feedback,
poor localization, social stigma, discomfort and poor reliability. Despite the
inherent limitations of hearing aids, in 1995, approximately 1.7 million
hearing aids were sold in the United States, representing a retail market of
approximately $1.2 billion. The United States market represents approximately
38% of the worldwide hearing aid market. The Company estimates that the
worldwide retail market for hearing aids exceeded $3.0 billion in 1995.
Rather than indirectly driving the ear's vibratory structure, the Vibrant
soundbridge is a direct drive device which incorporates the Company's patented
core technology, the Floating Mass Transducer ("FMT"). The FMT is a tiny
transducer, smaller than a grain of rice, that is attached directly to the
incus bone of the middle ear. The FMT converts sound into mechanical vibrations
and enhances the natural movement of the bones of the middle ear, which in turn
generate enhanced stimulation of the delicate
3
<PAGE>
sensory hair cells of the inner ear. The Company believes that its direct drive
soundbridges offer significant benefits, including improved sound quality and
speech intelligibility, elimination of acoustic feedback, improved sound
localization, minimized social stigma and improved reliability. The Company has
three patents issued in the United States and 21 patents pending in both the
United States and internationally covering a number of fundamental aspects of
the FMT and related technologies.
The Company is currently developing a family of Vibrant soundbridges,
including the Vibrant D soundbridge, which is designed to permit an even
greater degree of customization along with the additional benefit of digital
signal processing, and the Vibrant HF soundbridge, which is designed to provide
hearing correction to those individuals who have noise-induced hearing loss at
high frequencies but relatively normal hearing at lower frequencies. In
addition, the Company is in the early stage of developing versions of the
Vibrant soundbridge that are totally implantable with no external components.
The Company's soundbridges are designed to be implanted in a single ear in a
two-hour, outpatient procedure which requires surgical techniques similar to
those employed in common middle ear surgical procedures. The Company's strategy
is to market its soundbridges initially to those specialists in otology who are
currently most active in ear surgery and thereafter, to the general population
of Ear, Nose and Throat ("ENT") surgeons. Because the surgical procedure for
implanting the Vibrant soundbridge utilizes many of the same techniques
employed by surgeons trained and experienced in otological procedures, the
Company believes that surgeon training will not be a significant impediment to
market acceptance.
In September 1996, the Company initiated clinical trials of the Vibrant
soundbridge in both the United States and Europe, and in July 1997 the Company
initiated clinical trials of the Vibrant P soundbridge in Europe. As of
February 6, 1998, 50 patients have been implanted with the Company's
soundbridges of whom 47 have had the Audio Processor fitted and the
soundbridge's performance evaluated. In 1996, the Company received United
States Food and Drug Administration ("FDA") approval of an Investigational
Device Exemption ("IDE") to commence clinical testing of the Vibrant
soundbridge. In the United States, Phase I testing limited to two sites and
five patients has been completed. On November 14, 1997, the Company filed an
IDE supplement summarizing the Phase I results, finalizing the study protocol
and labeling claims, providing technical information regarding the Vibrant P
soundbridge, and requested permission to proceed to the pivotal study. On
December 11, 1997, the FDA approved the multi-center pivotal study in 55
subjects at up to 12 sites with the second generation Vibrant P soundbridge.
The Company has completed its European clinical trial and has submitted the
technical, preclinical and clinical data that it believes will be necessary,
together with the previously obtained certifications, to satisfy the applicable
regulatory requirements for commercial sales in the European Union ("EU").
The Company's objectives are to establish its family of Vibrant soundbridges
as the standard of care worldwide for the management of moderate to severe
hearing impairment and to establish Symphonix as the leader in the hearing
management market. Key elements of the Company's strategy include:
demonstrating improved quality of life, developing surgeon endorsement of the
Company's family of soundbridges, leveraging the Company's patented core
technology and protecting and enhancing the Company's proprietary position.
Symphonix is a development stage company and, at December 31, 1997, had
generated no revenues from operations and had an accumulated deficit of $18.5
million. The Company was incorporated under the laws of California in May 1994
and was reincorporated under the laws of Delaware in January 1998. The
Company's principal executive offices are located at 3047 Orchard Parkway, San
Jose, CA 95134. Its telephone number is (408) 232-0710.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company.......... 2,300,000 shares
Common Stock outstanding after the
offering(1)................................. 11,766,742 shares(1)
Use of proceeds.............................. For research and development,
including clinical trials;
development of a sales and
marketing organization; making
leasehold improvements and
other capital expenditures;
working capital and general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol................ SMPX
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
MAY 17, 1994 MAY 17, 1994
(DATE OF (DATE OF
INCEPTION) INCEPTION)
TO YEARS ENDED DECEMBER 31, TO
DECEMBER 31, ---------------------------- DECEMBER 31,
1994 1995 1996 1997 1997
------------ -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Costs and expenses:
Research and
development........... $ 707 $ 3,307 $ 5,399 $ 6,401 $ 15,814
General and
administrative........ 141 625 1,047 2,065 3,878
----- -------- -------- -------- --------
Loss from operations.... (848) (3,932) (6,446) (8,466) (19,692)
Interest income, net.... 96 280 337 475 1,188
----- -------- -------- -------- --------
Net loss................ $(752) $ (3,652) $ (6,109) $ (7,991) $(18,504)
===== ======== ======== ======== ========
Pro forma net loss per
common share and per
common share--assuming
dilution(2)............ $ (0.92)
========
Shares used in
calculation of pro
forma net loss per
common share and per
common share--assuming
dilution(2)............ 8,714
========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments....... $11,457 $36,325
Total assets............................................ 13,141 38,009
Long-term liabilities................................... 2,325 2,325
Deficit accumulated during the development stage........ (18,503) (18,503)
Total stockholders' equity.............................. 8,463 33,331
</TABLE>
- --------
(1) Based upon the number of shares outstanding as of December 31, 1997.
Excludes (i) 566,531 shares of Common Stock subject to outstanding options
at a weighted average exercise price of $1.30 per share under the Company's
1994 Stock Option Plan and 403,159 shares reserved for future issuance
thereunder (the "1994 Option Plan") and (ii) 33,611 shares issuable upon
exercise of outstanding warrants to purchase Common Stock at a weighted
average exercise price of $2.20 per share. See "Management--Incentive Stock
Plans" and "Description of Capital Stock--Warrants."
(2) See Note 11 of Notes to Consolidated Financial Statements for an
explanation for the computation of pro forma net loss per share.
(3) Adjusted to reflect the sale of 2,300,000 shares of Common Stock offered
hereby after deducting underwriting discounts and commissions and estimated
offering expenses and the receipt of the net proceeds therefrom. See "Use
of Proceeds."
5
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus. The following principal factors should be carefully
considered in evaluating the Company and its business before purchasing the
Common Stock offered hereby.
DEVELOPMENT STAGE COMPANY; HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES
Since the Company's inception in 1994, substantially all of the Company's
resources have been dedicated to research and development, and the Company has
not generated any revenue from product sales. All of the Company's products
are in development and will require additional clinical trials and, in some
cases, additional development and preclinical testing prior to the submission
of a regulatory application for commercial use. Since the Company's products
are currently in development, significant product revenues will not be
realized for at least several years, if ever. The Company is a development
stage company and, at December 31, 1997, had an accumulated deficit of $18.5
million. The Company expects its operating losses to continue at least through
1999 as it continues to expend substantial funds for clinical trials in
support of regulatory approvals, expansion of research and development
activities and establishment of commercial-scale manufacturing and sales and
marketing capabilities. Any commercialization of the Company's products will
require substantial development, clinical, regulatory, manufacturing, sales
and marketing and other expenditures. There can be no assurance that the
Company's soundbridges will be successfully commercialized or that the Company
will achieve significant revenues from either international or domestic sales.
In addition, there can be no assurance that the Company will achieve or
sustain profitability in the future. The Company's results of operations may
fluctuate from quarter to quarter or year to year and will depend upon
numerous factors, including action relating to regulatory matters, progress of
clinical trials, the timing and scope of research and development efforts, the
extent to which the Company's products gain market acceptance or achieve
reasonable reimbursement levels, the timing of scale-up of manufacturing
capabilities, the timing of expansion of sales and marketing activities and
competition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
LIMITED CLINICAL TESTING EXPERIENCE
The Company has conducted only limited clinical trials of its Vibrant and
Vibrant P soundbridges. The Company has received approval of an IDE to conduct
a clinical trial of the Vibrant and Vibrant P soundbridges, and the Vibrant
soundbridge has been the subject of limited clinical testing in the United
States. The Vibrant and the Vibrant P soundbridges have both been the subject
of limited clinical testing in Europe. None of the Company's other
soundbridges under development have been tested in human clinical trials. The
Company's soundbridges will require additional development, clinical trials
and regulatory approval prior to commercialization. The results from
preclinical studies and early clinical trials may not be indicative of results
obtained in later clinical trials, and there can be no assurance that clinical
trials conducted by the Company will demonstrate sufficient safety and
efficacy to obtain requisite approvals.
The rate of completion of the Company's clinical trials may be delayed by
many factors, including slower than anticipated patient enrollment or adverse
events occurring during clinical trials. Completion of preclinical and
clinical activities may take several years, and the length of time for
completion of the required studies is unpredictable. In addition, data
obtained from preclinical and clinical activities are susceptible to varying
interpretations, which could delay, limit or prevent regulatory approval. No
assurance can be given that any of the Company's clinical trials will be
successfully completed on a timely basis, or at all, that additional clinical
trials will be allowed by the FDA or other regulatory authorities or that such
clinical trials will commence as planned.
6
<PAGE>
The Company has submitted clinical data on 28 patients to the Company's
Notified Body, a certification body authorized to test and certify medical
devices for sale in the EU, to demonstrate the safety and performance of the
Vibrant and Vibrant P soundbridges. As of February 6, 1998, 45 patients in the
European clinical trial have been implanted with the Company's soundbridges,
of whom 42 have had the Audio Processor fitted and the soundbridge's
performance evaluated. There can be no assurance that such data will be
accepted by the Company's Notified Body, or that the Notified Body will not
require the Company to obtain additional data from additional clinical trials
involving more patients in order to demonstrate the safety and performance of
the Vibrant and Vibrant P soundbridges. If the Notified Body requires the
Company to submit additional data, the timing of regulatory approval and
commercialization of the Company's products in Europe could be delayed. See
"Business--Government Regulation."
RELIANCE ON FMT TECHNOLOGY
The Company has concentrated its efforts primarily on the development,
implementation and acceptance of the FMT, the patented core direct drive
technology upon which all of the Company's soundbridges are based, and will be
dependent upon the successful development of its soundbridges to generate
revenues. The Company's soundbridges employ a direct drive approach to the
management of hearing impairment, which is a novel development. There can be
no assurance that the Company's soundbridges, based on the Company's FMT
technology, will prove to be safe and effective, or that if proven safe and
effective, can be manufactured at reasonable cost or successfully
commercialized. See "Business--Products Under Development."
NO ASSURANCE OF PRODUCT APPROVAL; GOVERNMENT REGULATION
The research, preclinical and clinical activities, manufacturing, labeling,
distribution, sale, marketing, advertising and promotion of the Company's
proposed products are subject to extensive and rigorous government regulation
in the United States and certain other countries. In the United States and
certain other countries, the process of obtaining and maintaining required
regulatory clearances or approvals is lengthy, expensive and uncertain. The
Company's future success will be significantly dependent upon commercial sales
of its products under development. The Company will also not be able to market
such products domestically or overseas until it meets the safety and quality
regulations of each jurisdiction in which the Company, its agents or
distributors seek to sell such products. Noncompliance with applicable FDA
requirements can result in administrative sanctions or judicially imposed
sanctions such as civil penalties, criminal prosecution, injunctions, product
seizure or detention, product recalls, or total or partial suspension of
production. In addition, noncompliance may result in the FDA's refusal to
approve pending applications for marketing approval or clearance or
supplements to approved marketing approvals, or in the withdrawal of marketing
approval.
Before the Company's products can be commercialized in the United States,
the Company must submit, in a premarket approval ("PMA") application,
extensive data on preclinical studies and clinical trials, device design,
manufacturing, labeling, promotion and advertising, as well as other aspects
of the product. In addition, the Company must submit clinical data gathered in
trials conducted under an IDE demonstrating to the satisfaction of the FDA
that the product is safe and effective for its labeling claims, and obtain
marketing approval from the FDA. Phase I of the IDE study has been completed.
Phase I was limited to two sites and five subjects and was intended to test
the safety and provide preliminary evidence of the effectiveness of the device
and the surgical procedure used to implant the device. On November 14, 1997,
the Company filed an IDE supplement summarizing the Phase I results,
finalizing the study protocol and labeling claims, providing technical
information regarding the Vibrant P soundbridge, and requested permission to
proceed to the pivotal study. On December 11, 1997, the FDA approved the
multi-center pivotal study in 55 subjects at up to 12 sites with the second
generation Vibrant P soundbridge. There can be no assurance that the Company's
clinical trial effort will progress as expected, will not be delayed or that
such effort will lead to the successful development of any product. No
assurance can be given that any of the Company's clinical trials will continue
to be allowed by the FDA or other regulatory agencies.
7
<PAGE>
Any delays in the Company's clinical trials would have a material adverse
effect on the Company's business, financial condition and results of
operations. Success in preclinical studies or early stage clinical trials does
not assure success in later stage clinical trials. Data obtained from
preclinical and clinical activities are susceptible to varying interpretations
which could delay, limit or prevent regulatory approval. Further, there can be
no assurance that if such testing of products under development is completed,
any such devices will be accepted for formal review by the FDA or approved by
the FDA for marketing in the United States.
Subsequent to the receipt of an FDA approval, the Company will continue to
be regulated by the FDA with regard to the reporting of adverse events related
to its products, and ongoing Quality System regulation ("QS regulation")
compliance (which includes elaborate testing, control, documentation and other
quality assurance procedures). The Company's manufacturing facility must be
registered with the FDA and the California Food and Drug Branch and will be
subject to periodic inspections by the FDA and by the California Food and Drug
Branch. The timing and requirements of obtaining approval for sale in foreign
countries may differ from that required for FDA approval. In addition, there
may be foreign regulatory barriers other than pre-market approval.
The EU consists of 15 countries encompassing most of the major countries in
Europe. The EU has adopted numerous directives and standards regulating the
design, manufacture, clinical trial, labeling, and adverse event reporting for
medical devices. The principal directives prescribing the laws and regulations
pertaining to medical devices in the EU are the Medical Devices Directive,
93/42/EEC ("MDD") and the Active Implantable Medical Devices Directive,
90/385/EEC ("AIMDD"). In the EU, the Company's soundbridges will be regulated
as active implantables and therefore be governed by the AIMDD. Certain other
countries, such as Switzerland, have voluntarily adopted laws and regulations
that mirror those of the EU with respect to medical devices.
The Company's facilities have been inspected by the Notified Body and its
quality system has been certified by the Notified Body as being in compliance
with the required standards. The Company has submitted the technical,
preclinical and clinical data that it believes will be necessary, together
with the previously obtained certifications, to satisfy the applicable
regulatory requirements for commercial sales in the EU. The Company has
submitted clinical data to its Notified Body on 28 patients to demonstrate the
safety and performance of the Vibrant and Vibrant P soundbridges. As of
February 6, 1998, a total of 45 patients in the European clinical trial have
been implanted (19 with the Vibrant and 26 with the Vibrant P soundbridge) of
whom 42 have had the Audio Processor fitted and the soundbridge's performance
evaluated. There can be no assurance that such data will be accepted by the
Company's Notified Body, or that the Notified Body will not require the
Company to obtain additional data from additional clinical trials involving
more patients in order to demonstrate the safety and performance of the
Vibrant soundbridge and the Vibrant P soundbridge. If the Notified Body
requires the Company to submit additional data, the timing of regulatory
approval and commercialization of the Company's products in Europe could be
delayed.
Once a manufacturer has satisfactorily completed the regulatory compliance
tasks required by the directives and received favorable determinations by the
Notified Body, it is eligible to place the CE mark on its products.
Manufacturers are subject to ongoing regulation under the AIMDD. The quality
system will be subject to periodic audit and recertification, and serious
adverse events must be reported to the authorities in the country where the
incident takes place. If such incidents occur, the manufacturer may have to
take remedial action, including withdrawal of the product from the EU market.
See "Business--Products Under Development" and "--Government Regulation."
NO ASSURANCE OF MARKET ACCEPTANCE
The market acceptance of the Company's soundbridges will depend upon their
acceptance by the medical community and patients as clinically useful,
reliable and cost-effective compared to other
8
<PAGE>
devices. Clinical acceptance will depend on numerous factors, including the
establishment of the safety and the effectiveness of the soundbridge's ability
to drive the ossicles directly and improve hearing over currently available
hearing aids. Clinical acceptance will also depend on the receipt of
regulatory approvals in the United States and internationally and the
Company's ability to adequately train ear surgeons on the techniques for
implanting the Company's soundbridges. In addition, there can be no assurance
that the Company's soundbridges will be preferable alternatives to existing
devices, some of which, such as the acoustic hearing aid, do not require
surgery, or that the Company's soundbridges will not be rendered obsolete or
noncompetitive by products under development by other companies. Patient
acceptance of the Company's soundbridges will depend in part upon physician
and surgeon recommendations as well as other factors, including the
effectiveness, safety, reliability and invasiveness of the procedure as
compared to established approaches. Even if the Company's soundbridges are
adopted by the medical community, a significant market may not develop for the
Company's products unless acceptable reimbursement from health care payors is
available. There can be no assurance that the Company's soundbridges under
development will be accepted by the medical community or consumers or that
market demand for such products will be sufficient to allow the Company to
achieve profitable operations. Failure of the Company's soundbridges, for
whatever reason, to achieve significant adoption by the medical community or
consumers or failure of the Company's products to achieve any significant
market acceptance would have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Government Regulation" and "--Third-Party Reimbursement."
HIGHLY COMPETITIVE MARKET; RISK OF COMPETING HEARING DEVICES
The medical device industry is subject to intense competition in the United
States and abroad. The Company believes its products will compete primarily
with the traditional approaches to managing hearing impairment, principally
hearing aids. Principal manufacturers of acoustic hearing aids include Siemens
Hearing Instruments, Inc., Philips Medical Systems North America Co., Starkey
Laboratories Inc., Beltone Electronics Corp., Dahlberg Inc., ReSound Corp.,
Oticon, Inc., Widex Hearing Aid Co., Inc. and Phonak Inc. There can be no
assurance that the Company's soundbridges will be able to successfully compete
with established hearing aid products. In addition, there can be no assurance
that these potential competitors will not succeed in developing technologies
and products in the future that are more effective, less expensive than those
being developed by the Company or that do not require surgery. The Company is
aware of several university research groups and development-stage companies
that have active research or development programs related to direct drive
sensorineural hearing devices. In addition, some large medical device
companies, some of which are currently marketing implantable medical devices,
may develop programs in hearing management. Certain of these companies have
substantially greater financial, technical, manufacturing, marketing and other
resources than the Company. In addition, there can be no assurance that
certain of the Company's competitors will not develop technologies and
products that may be more effective in managing hearing impairment than the
Company's products or that render the Company's products obsolete. See
"Business--Competition."
LIMITED MANUFACTURING EXPERIENCE; SCALE-UP RISK; DEPENDENCE ON KEY SUPPLIERS
The Company currently manufactures its products in limited quantities for
laboratory testing and for its United States and European clinical trials. The
manufacture of the Vibrant soundbridge is a complex operation involving a
number of separate processes, components and assemblies. Each device is
assembled and individually tested by the Company. The manufacturing process
consists primarily of assembly of internally manufactured and purchased
components and subassemblies, and certain processes are performed in an
environmentally controlled area. After completion of the manufacturing and
testing processes, implantable devices are sterilized by a sub-contracted
supplier. The Company has no experience manufacturing its products in the
volumes or with the yields that
9
<PAGE>
will be necessary for the Company to achieve significant commercial sales, and
there can be no assurance that the Company can establish high-volume
manufacturing capacity or, if established, that the Company will be able to
manufacture its products in high volumes with commercially acceptable yields.
If the Company receives regulatory approval to commercialize its products, it
will need to expend significant capital resources and develop manufacturing
expertise to establish large-scale manufacturing capabilities. The Company
intends to expand its manufacturing capacity into a new facility in the first
quarter of 1998, before it commences large-scale commercial manufacturing
activities. Furthermore, prior to approval of a PMA, the Company's facilities,
procedures and practices will be subject to a pre-approval inspection by the
FDA. The Company's inability to successfully manufacture its products in a
timely manner or at a reasonable cost could have a material adverse effect on
the Company's business, financial condition and results of operations.
Raw materials, components and subassemblies for the Company's soundbridges
are purchased from various qualified suppliers. A number of components and
subassemblies, such as silicone, control electronics and implant packaging are
provided by single source suppliers. One component, the signal processing
microcircuit, is provided by a sole source supplier, Gennum Corporation. None
of the Company's vendors is contractually obligated to continue to supply the
Company nor is the Company contractually obligated to buy from a particular
vendor. For certain of these components and subassemblies, there are
relatively few alternative sources of supply, and establishing additional or
replacement suppliers for such components and subassemblies could not be
accomplished quickly. In addition, if the Company wishes to significantly
modify its manufacturing processes or change the supplier of a critical
component, additional approvals will be required from the FDA before the
change can be implemented. Because of the long lead time for some components
and subassemblies that are currently available from a single source, a
supplier's inability or failure to supply such components or subassemblies in
a timely manner or the Company's decision to change its suppliers could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Manufacturing."
DEPENDENCE UPON PATENTS AND PROPRIETARY TECHNOLOGY
In the United States, the Company holds three issued patents and 11 pending
patent applications. Additionally, the Company has ten pending foreign patent
applications. These patents and patent applications generally cover the
invention and application of the FMT as well as the specific application of
the FMT and other concepts in the field of hearing impairment. In addition,
the Company has licensed, on a royalty-free basis, a United States patent
covering the magnetic attachment of an external audio processor to an
implanted receiver. The Company's success will depend in part on its ability
to obtain patent protection for its products and processes, to preserve its
trade secrets and to operate without infringing or violating the proprietary
rights of others.
The patent positions and trade secret provisions of medical device
companies, including those of the Company, are uncertain and involve complex
and evolving legal and factual questions. The coverage sought in a patent
application either can be denied or significantly reduced before or after the
patent is issued. Consequently, there can be no assurance that any patents
from pending applications or from any future patent application will be
issued, that the scope of the patent protection will exclude competitors or
provide competitive advantages to the Company, that any of the Company's
patents will be held valid if subsequently challenged or that others will not
claim rights in or ownership of the patents and other proprietary rights held
by the Company. Since patent applications are secret until patents are issued
in the United States or corresponding applications are published in other
countries, and since publication of discoveries in the scientific or patent
literature often lags behind actual discoveries, the Company cannot be certain
that it was the first to file patent applications for such inventions.
In addition, there can be no assurance that competitors, many of which have
substantial resources, will not seek to apply for and obtain patents that will
prevent, limit or interfere with the
10
<PAGE>
Company's ability to make, use or sell its products either in the United
States or in international markets. Although the Company has conducted
searches of patents issued to other companies, research or academic
institutions or others, there can be no assurance that such patents do not
exist, have not been filed or could not be filed or issued, which contain
claims relating to the Company's technology, products or processes. Patents
issued and patent applications filed in the United States or internationally
relating to medical devices are numerous and there can be no assurance that
current and potential competitors and other third parties have not filed or in
the future will not file applications for, or have not received or in the
future will not receive, patents or obtain additional proprietary rights
relating to products or processes used or proposed to be used by the Company.
In addition, patent applications in foreign countries are maintained in
secrecy for a period after filing. Publication of discoveries in the
scientific or patent literature tends to lag behind actual discoveries and the
filing of related patent applications. There may be pending applications,
which if issued with claims in their present form, might provide proprietary
rights to third parties relating to products or processes used or proposed to
be used by the Company. The Company may be required to obtain licenses to
patents or proprietary rights of others. Further, the laws of certain foreign
countries do not protect the Company's intellectual property rights to the
same extent as do the laws of the United States. Litigation or regulatory
proceedings, which could result in substantial cost and uncertainty to the
Company, may also be necessary to enforce patent or other intellectual
property rights of the Company or to determine the scope and validity of other
parties' proprietary rights. There can be no assurance that the Company will
have the financial resources to defend its patents from infringement or claims
of invalidity.
The Company also relies upon trade secrets and other unpatented proprietary
technology, and no assurance can be given that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to or disclose the Company's proprietary technology or
that the Company can meaningfully protect its rights in such unpatented
proprietary technology. The Company's policy is to require each of its
employees, consultants, investigators and advisors to execute a
confidentiality agreement upon the commencement of an employment or consulting
relationship with the Company. These agreements generally provide that all
inventions conceived by the individual during the term of the relationship
shall be the exclusive property of the Company and shall be kept confidential
and not be disclosed to third parties except in specified circumstances. There
can be no assurance, however, that these agreements will provide meaningful
protection for the Company's proprietary information in the event of
unauthorized use or disclosure of such information.
Recently Public Law 104-208 was signed into law in the United States and
limits the enforcement of patents relating to the performance of surgical or
medical procedures on a body. This law precludes medical practitioners and
health care entities who practice these procedures from being sued for patent
infringement. Therefore, depending upon how these limitations are interpreted
by the courts, they could have a material adverse effect on the Company's
ability to enforce any of its proprietary methods or procedures deemed to be
surgical or medical procedures. In certain other countries outside the United
States, patent coverage relating to the performance of surgical or medical
procedures is not available. Therefore, patent coverage in such countries will
be limited to the FMT or to narrower aspects of the FMT.
The medical device industry in general has been characterized by substantial
litigation. Litigation regarding patent and other intellectual property
rights, whether with or without merit, could be time-consuming and expensive
to respond to and could distract the Company's technical and management
personnel. The Company may become involved in litigation to defend against
claims of infringement by the Company, to enforce patents issued to the
Company or to protect trade secrets of the Company. If any relevant claims of
third-party patents are held as infringed and not invalid in any litigation or
administrative proceeding, the Company could be prevented from practicing the
subject
11
<PAGE>
matter claimed in such patents, or would be required to obtain licenses from
the patent owners of each such patent, or to redesign its products or
processes to avoid infringement. In addition, in the event of any possible
infringement, there can be no assurance that the Company would be successful
in any attempt to redesign its products or processes to avoid such
infringement or in obtaining licenses on terms acceptable to the Company, if
at all. Accordingly, an adverse determination in a judicial or administrative
proceeding or failure by the Company to redesign its products or processes or
to obtain necessary licenses could prevent the Company from manufacturing and
selling its products, which would have a material adverse effect on the
Company's business, financial condition and results of operations. Although
the Company has not been involved in any litigation to date, in the future,
costly and time-consuming litigation brought by the Company may be necessary
to enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company or to determine the enforceability, scope and validity of
the proprietary rights of others. See "Business--Patents and Proprietary
Technology."
FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company will expend substantial funds in the future for research and
development, preclinical and clinical testing, capital expenditures and the
manufacturing, marketing and sale of its products. The timing and amount of
spending of such capital resources cannot be accurately predicted and will
depend upon several factors, including the progress of its research and
development efforts and preclinical and clinical activities, competing
technological and market developments, the time and costs of obtaining
regulatory approvals, the time and costs involved in filing, prosecuting and
enforcing patent claims, the progress and cost of commercialization of
products currently under development, market acceptance and demand for the
Company's products if approved for marketing and other factors not within the
Company's control. While the Company believes that the net proceeds of this
offering, together with its existing capital resources and projected interest
income, will be sufficient to fund its operations and its capital investments
for at least the next 18 months, there can be no assurance that the Company
will not require additional financing prior to that time. There can be no
assurance that such additional financing will be available on a timely basis
on terms acceptable to the Company, or at all, or that such financing will not
be dilutive to stockholders. If adequate funds are not available, the Company
could be required to delay development or commercialization of certain of its
products, to license to third parties the rights to commercialize certain
products or technologies that the Company would otherwise seek to
commercialize for itself, or to reduce the marketing, customer support or
other resources devoted to certain of its products, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Use of Proceeds," "Dilution" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
LACK OF SALES, MARKETING AND DISTRIBUTION EXPERIENCE
The Company will have to establish an effective internal sales and marketing
organization prior to commercial introduction of its products. The Company is
in the process of establishing a sales and marketing organization in Europe.
An office has been established in Basel, Switzerland, where the Company's
Director of European Sales and Marketing and European Clinical Manager are
based. The Company has recruited sales personnel to provide direct sales
coverage in Germany, France and the United Kingdom, who will commence their
employment during the first quarter of 1998. In other international markets,
including Japan, the Company will seek to establish a network of distributors.
By the end of the first quarter of 1998, the Company intends to establish
distributors in Italy, Spain and the Benelux countries. There can be no
assurance that the Company will be able to build a direct sales force or
marketing organization in any country, that establishing a direct sales force
or marketing organization will be cost-effective or that the Company's sales
and marketing efforts will be successful. In addition, the Company has had
discussions with only a limited number of potential
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<PAGE>
international distributors and has not yet entered into any agreements with
distributors. There can be no assurance that the Company will be able to enter
into agreements with qualified distributors on a timely basis on terms
acceptable to the Company, or at all, or that such distributors will devote
adequate resources to selling the Company's products. Failure to establish a
direct sales force domestically and in select international markets, and to
enter into successful distribution relationships, could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Sales, Marketing and Training."
UNCERTAIN AVAILABILITY OF THIRD-PARTY REIMBURSEMENT
The Company believes that its products will generally be purchased by
hospitals and clinics upon the recommendation of a surgeon. In the United
States, hospitals, physicians and other health care providers that purchase
medical devices generally rely on third-party payors, to reimburse all or part
of the cost of the procedure in which the medical device is being used. Such
third-party payors have become increasingly sensitive to cost containment in
recent years and place a high degree of scrutiny on coverage and payment
decisions for new technologies and procedures.
Hearing aids, which are the subject of 510(k) clearance and do not involve
surgery, are generally not reimbursed, although a modest reimbursement is
provided under certain insurance plans. Traditionally, hearing aid users have
paid for these devices directly. There can be no assurance that the Company
will be able to demonstrate improvement in quality of life or that
reimbursement will ever be available for the Company's products. During
clinical trials, the Company does not anticipate that there will be any
reimbursement for the Vibrant soundbridge implant or procedure.
Certain third-party payors are moving toward a managed care system in which
they contract to provide comprehensive health care for a fixed cost per
person. The fixed cost per person established by these third-party payors may
be independent of the hospital's cost incurred for the specific case and the
specific devices used. Medicare and other third-party payors are increasingly
scrutinizing whether to cover new products and the level of reimbursement for
covered products. Because the Company's products are currently under
development and have not received FDA clearance or approval, uncertainty
exists regarding the availability of third-party reimbursement for procedures
that would use the Company's soundbridges. Failure by physicians, hospitals
and other potential users of the Company's soundbridges to obtain sufficient
reimbursement from third-party payors for the procedures in which the
Company's soundbridges are intended to be used could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Third-party payors that do not use prospectively fixed payments increasingly
use other cost-containment processes or require various outcomes data that may
pose administrative hurdles to the use of the Company's soundbridges. In
addition, third-party payors may deny reimbursement if they determine that the
device used in a procedure is unnecessary, inappropriate, experimental, used
for a non-approved indication or is not cost-effective. Potential purchasers
must determine that the clinical benefits of the Company's products justify
the additional cost or the additional effort required to obtain prior
authorization or coverage and the uncertainty of actually obtaining such
authorization or coverage.
If the Company obtains the necessary foreign regulatory approvals, market
acceptance of the Company's products and products currently under development
in international markets would be dependent, in part, upon the availability of
reimbursement within prevailing health care payment systems. Reimbursement and
health care payment systems in international markets vary significantly by
country and include both government sponsored health care and private
insurance. There can be no assurance that any international reimbursement
approvals will be obtained in a timely manner, if at all. Failure to receive
international reimbursement approvals could have a material adverse effect on
market acceptance of the Company's products in the international markets in
which such approvals are sought. See "Business--Third-Party Reimbursement."
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<PAGE>
DEPENDENCE UPON KEY PERSONNEL
The Company's future success depends in significant part upon the continued
service of certain key scientific, technical and management personnel.
Competition for such personnel is intense and there can be no assurance that
the Company can retain its key scientific, technical and managerial personnel
or that it can attract, assimilate or retain other highly qualified
scientific, technical and managerial personnel in the future. The loss of key
personnel, especially if without advance notice, or the inability to hire or
retain qualified personnel could have a material adverse effect upon the
Company's business, financial condition and results of operations. The Company
has not entered into employment agreements with any of its key personnel. The
Company is the beneficiary under a $1.0 million key man insurance policy on
Harry S. Robbins, its President and Chief Executive Officer.
PRODUCT LIABILITY RISK; POSSIBLE INSUFFICIENCY OF INSURANCE
The manufacture, sale and implantation of the Company's products involve the
risk of product liability claims. The Company currently has limited product
liability insurance. There can be no assurance that such insurance will be
available on commercially reasonable terms or that the coverage limits will be
adequate. The Company intends to evaluate its coverage on a regular basis and
in connection with the introduction of products currently under development.
Such insurance is expensive and may not be available on acceptable terms, in
sufficient amount of coverage or at all. A successful claim brought against
the Company in excess of its insurance coverage would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Product Liability."
CONTROL BY EXISTING STOCKHOLDERS
After the completion of this offering, current stockholders, including
certain executive officers and directors of the Company and their affiliates,
will own approximately 81.4% of the outstanding Common Stock (assuming the
exercise of all outstanding options and warrants). As a result, these
stockholders will, to the extent they act together, continue to have the
ability to exert significant influence and control over matters requiring the
approval of the Company's stockholders, including the election of a majority
of the Company's Board of Directors. See "Principal Stockholders."
POTENTIAL ADVERSE IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
Sales of Common Stock (including shares issued upon the exercise of
outstanding options) in the public market after this offering could materially
and adversely affect the market price of the Common Stock. Such sales also
might make it more difficult for the Company to sell equity securities or
equity-related securities in the future at a time and price that the Company
deems appropriate. Upon the completion of this offering, the Company will have
11,766,742 shares of Common Stock outstanding (assuming no exercise of options
after December 31, 1997), of which the 2,300,000 shares offered hereby will be
freely tradeable (unless held by affiliates of the Company) without
restriction. The remaining 9,466,742 shares will be restricted securities
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act"). The Company and its directors, executive officers and all other holders
of such restricted securities, have entered into lock-up agreements with the
Company or Cowen & Company (the "Lock-up Agreements") under which they have
agreed not to offer, sell, contract to sell, grant any options to purchase or
otherwise dispose of, directly or indirectly, any shares of Common Stock or
options to acquire shares of Common Stock, or securities exchangeable or
convertible into shares of Common Stock, owned by them for a period of 180
days following the day on which the Registration Statement becomes effective
without the prior written consent of Cowen & Company or the Company, as the
case may be except that, without such consent, the Company may issue Common
Stock and grant options pursuant to the 1994 Option Plan and issue Common
Stock pursuant to the exercise of outstanding warrants and the current
stockholders
14
<PAGE>
of the Company who are not executive officers or directors of the Company may
sell Common Stock acquired in the offering or in the open market. The Company
has agreed not to release any stockholders from the terms of the Lock-up
Agreements with the Company. Cowen & Company may, in its sole discretion and
at any time without notice, release all or any portion of the shares subject
to such Lock-up Agreements. As a result of the Lock-up Agreements and the
provisions of Rules 144 and 701 promulgated under the Securities Act, upon
consummation of this offering, such restricted securities will be available
for public resale in the public market as follows: (i) no shares will be
available for immediate sale on the date of this Prospectus and (ii)
approximately 9,778,357 shares will be available for public resale 180 days
after the date of this Prospectus, upon expiration of the Lock-up Agreements
(including approximately 311,615 shares subject to outstanding vested options
and outstanding warrants), subject in some cases to volume limitations
pursuant to Rule 144. In addition, 6,715,689 of the shares outstanding
immediately following the completion of this offering (including up to 33,611
shares of Common Stock issuable upon exercise of certain outstanding warrants)
will be entitled to registration rights with respect to such shares upon
termination of the Lock-up Agreements. The number of shares sold in the public
market could increase if such registration rights are exercised and such sales
may have an adverse effect on the market price of the Common Stock. See
"Shares Eligible for Future Sale."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK
Prior to this offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or
be sustained or that the market price of the Common Stock will not decline
below the initial public offering price. The initial public offering price of
the Common Stock is determined by negotiations between the Company and the
Underwriters. As such, the initial public offering price is not necessarily
related to the Company's net worth or any other established criteria of value
and may not bear any relationship to the market price of the Common Stock
following the completion of the offering. The market prices for securities of
medical device companies have historically been highly volatile. Announcements
of technological innovations or new products by the Company or its
competitors, developments concerning proprietary rights, including patents and
litigation matters, publicity regarding actual or potential results with
respect to products under development by the Company or others, regulatory
developments in both the United States and foreign countries and public
concern as to the safety of new technologies, changes in financial estimates
by securities analysts or failure of the Company to meet such estimates and
other factors may have a significant impact on the market price of the Common
Stock. In addition, the Company believes that fluctuations in its operating
results may cause the market price of its Common Stock to fluctuate, perhaps
substantially. See "Underwriting."
DILUTION; ABSENCE OF DIVIDENDS
Purchasers of shares of Common Stock offered hereby will experience an
immediate dilution of $9.17 in the pro forma net tangible book value per share
of their Common Stock. The Company has never paid dividends on its Common
Stock and does not anticipate paying any cash dividends in the foreseeable
future. See "Dividend Policy" and "Dilution."
ANTI-TAKEOVER EFFECT OF DELAWARE LAW AND CERTAIN CHARTER, BYLAWS AND
CONTRACTUAL PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws may have the effect of making it more difficult for a third party
to acquire, or discouraging a third party from attempting to acquire, control
of the Company. Such provisions could limit the price that certain investors
might be willing to pay in the future for shares of the Company's Common
Stock. Certain of these provisions eliminate the right of stockholders to act
by written consent without a meeting and specify procedures for director
nominations by stockholders and submission of other proposals
15
<PAGE>
for consideration at stockholder meetings. In addition, the Company's Board of
Directors has the authority to issue up to 5,000,000 shares of Preferred Stock
and to determine the price, rights, preferences, privileges and restrictions
of those shares without any further vote or action by the stockholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be
issued in the future. The issuance of Preferred Stock could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. The Company has no present plans to
issue shares of Preferred Stock. Certain provisions of Delaware law applicable
to the Company could also delay or make more difficult a merger, tender offer
or proxy contest involving the Company, including Section 203 of the Delaware
General Corporation Law, which prohibits a Delaware corporation from engaging
in any business combination with any interested stockholder for a period of
three years unless certain conditions are met. The existence of a classified
Board of Directors, the inability of stockholders to act by written consent
without a meeting, the procedures required for director nominations and
stockholder proposals and Delaware law could have the effect of delaying,
deferring or preventing a change in control of the Company, including without
limitation, discouraging a proxy contest or making more difficult the
acquisition of a substantial block of the Company's Common Stock. These
provisions could also limit the price that investors might be willing to pay
in the future for shares of the Company's Common Stock. In addition, the
Company has granted one of its existing stockholders, Johnson & Johnson
Development Corporation ("JJDC"), first negotiation rights with regard to
certain proposed transactions, which may have the effect of making it more
difficult for a third party to acquire, or discouraging a third party from
attempting to acquire, control of the Company. See "Certain Transactions" and
"Description of Capital Stock."
16
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including without
limitation, statements containing the words "believes," "anticipates,"
"expects" and words of similar import, constitute "forward-looking
statements." Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of Symphonix to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include the following: uncertainties
related to the early stage of the Company's development; limited clinical
testing experience; uncertainties related to the reliance on the Company's FMT
technology; existing government regulations and changes in, or the failure to
comply with, government regulations; the Company's limited manufacturing
experience, the risk associated with manufacturing scale-up, and the Company's
dependence on key suppliers; uncertainty of market acceptance; history of
operating losses and expectations of future losses; the highly competitive
market and the risk of competing hearing management approaches; dependence on
patents and proprietary technology and uncertainty of patent protection;
future capital needs and uncertainty of additional funding; dependence on key
personnel; the Company's lack of sales, marketing and distribution experience
and reliance on third parties to perform such functions; uncertain
availability of third-party reimbursement and other factors referenced in this
Prospectus. Certain of these factors are discussed in more detail elsewhere in
this Prospectus, including, without limitation, under the captions "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business." Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward-looking statements. Symphonix disclaims any obligation to
update any such factors or to publicly announce the result of any revisions to
any of the forward-looking statements contained herein to reflect future
events or developments.
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 2,300,000 shares of Common
Stock offered hereby are estimated to be approximately $24.9 million ($28.7
million if the Underwriters' over-allotment option is exercised in full) after
deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company.
The Company anticipates that it will use approximately $10.0 million of the
net proceeds of this offering to fund the Company's research and development
efforts, including clinical trials, approximately $3.0 million to develop a
sales and marketing organization and initiate commercial sales of its
products, when and if approved for marketing by regulatory authorities, and
approximately $1.0 million for making leasehold improvements and other capital
expenditures. The Company will use the remaining net proceeds for working
capital and general corporate purposes. Although the Company believes the
proceeds of this offering, together with its existing resources and projected
interest income will be adequate to fund its operations and its capital
investments for at least the next 18 months, the timing and amount of spending
of such capital resources cannot be accurately determined at this time and
will depend upon several factors, including the timing and cost of obtaining
regulatory approvals, progress of its research and development efforts and
preclinical and clinical activities, competing technological and market
developments, commercialization of products currently under development, and
market acceptance and demand for the Company's products if approved for
marketing. The Company's management will retain broad discretion in the
allocation of a substantial portion of the net proceeds. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Business--Facilities."
Pending such uses, the Company intends to invest the net proceeds in short-
term, interest-bearing, investment grade securities.
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its capital
stock. The Company currently expects to retain its future earnings for use in
the operation and expansion of its business and does not anticipate paying any
cash dividends in the foreseeable future. Additionally, under the Company's
line of credit agreement, the Company is prohibited from paying cash dividends
without the bank's prior approval.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997, (i) on an actual basis, (ii) on a pro forma basis after
giving effect to the conversion of all outstanding shares of Preferred Stock
into Common Stock upon the closing of the offering made hereby and the
restatement of the Company's Certificate of Incorporation to provide for
authorized capital stock consisting of 50,000,000 shares of Common Stock and
5,000,000 shares of undesignated Preferred Stock, and (iii) as adjusted to
reflect the application of the estimated net proceeds from the sale of
2,300,000 shares of Common Stock offered hereby:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------
PRO AS
ACTUAL FORMA ADJUSTED
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Capital lease obligation, less current
portion(1)...................................... $ 325 $ 325 $ 325
Bank borrowings(2)............................... 2,000 2,000 2,000
-------- -------- --------
Stockholders' equity:
Preferred Stock; $0.001 par value; 9,750,000
shares authorized; 9,194,631 shares issued and
outstanding, actual; 5,000,000 shares
authorized, none issued and outstanding, pro
forma and as adjusted......................... 9 -- --
Common Stock; $0.001 par value; 20,000,000
shares authorized; 2,784,664 shares issued and
outstanding, actual; 50,000,000 shares
authorized, 9,466,742 shares issued and
outstanding, pro forma; 50,000,000 shares
authorized, 11,766,742 shares issued and
outstanding, as adjusted(3)................... 3 10 12
Notes receivable from stockholders............... (499) (499) (499)
Deferred compensation............................ (2,073) (2,073) (2,073)
Unrealized losses on short-term investments...... (1) (1) (1)
Additional paid-in capital....................... 29,526 29,528 54,394
Cumulative translation adjustments............... 1 1 1
Deficit accumulated during the development stage. (18,503) (18,503) (18,503)
-------- -------- --------
Total stockholders' equity................... 8,463 8,463 33,331
-------- -------- --------
Total capitalization......................... $ 10,788 $ 10,788 $ 35,656
======== ======== ========
</TABLE>
- --------
(1) See Note 5 of Notes to Consolidated Financial Statements.
(2) See Note 6 of Notes to Consolidated Financial Statements.
(3) Based upon shares outstanding as of December 31, 1997. Excludes (i)
566,531 shares issuable upon exercise of options outstanding at a weighted
average exercise price of $1.30 per share under the 1994 Option Plan and
403,159 shares reserved for future issuance thereunder and (ii) 33,611
shares issuable upon exercise of outstanding warrants to purchase Common
Stock at a weighted average exercise price of $2.20 per share. See
"Management--Incentive Stock Plans" and "Description of Capital Stock--
Warrants."
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DILUTION
The pro forma net tangible book value of the Company as of December 31, 1997
was $8.5 million or $0.89 per share of Common Stock. Pro forma net tangible
book value per share represents the Company's total tangible assets less total
liabilities, divided by the pro forma number of outstanding shares of Common
Stock (after giving effect to the conversion of the Preferred Stock into
Common Stock). Dilution per share represents the difference between the amount
per share paid by investors in this offering and the pro forma net tangible
book value per share after the offering. After giving effect to the sale of
2,300,000 shares in this offering and after deducting the underwriting
discounts and commissions and estimated offering expenses, the pro forma net
tangible book value of the Company as of December 31, 1997 would have been
$33.3 million or $2.83 per share. This represents an immediate increase of pro
forma net tangible book value of $1.94 per share to existing stockholders and
an immediate dilution in pro forma net tangible book value of $9.17 per share
to new investors purchasing shares of Common Stock in this offering, as
illustrated in the following table:
<TABLE>
<S> <C> <C>
Initial public offering price per share........................ $12.00
Pro forma net tangible book value per share before the
offering.................................................... $0.89
Increase attributable to new investors....................... 1.94
-----
Pro forma net tangible book value per share after the offering. 2.83
------
Dilution per share to new investors............................ $ 9.17
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1997, the difference between existing stockholders and new investors with
respect to the number of shares of Common Stock purchased from the Company,
the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 9,466,742 80.5% $27,389,883 49.8% $ 2.89
New investors.............. 2,300,000 19.5 27,600,000 50.2% 12.00
---------- ----- ----------- -----
Total.................... 11,766,742 100.0% $54,989,883 100.0%
========== ===== =========== =====
</TABLE>
The computations in the above tables assume (i) no exercise of outstanding
stock options or warrants and (ii) the conversion of all outstanding shares of
Preferred Stock into Common Stock upon the closing of this offering. As of
December 31, 1997, there were options outstanding to purchase up to 566,531
shares of Common Stock at a weighted average exercise price of $1.30 per share
under the 1994 Option Plan and warrants outstanding to purchase up to
33,611 shares of Common Stock at a weighted average exercise price of $2.20
per share. To the extent outstanding options are exercised or warrants are
further exercised, there will be further dilution to new investors. See
"Management--Incentive Stock Plans," "Description of Capital Stock--Warrants"
and "Underwriting."
20
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected financial data is qualified in its entirety by and
should be read in conjunction with the Company's Consolidated Financial
Statements and the related Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus. The statement of operations data for the period from May
17, 1994 (date of inception) to December 31, 1994 and for the years ended
December 31, 1995, 1996 and 1997, and the balance sheet data as of December
31, 1996 and 1997 are derived from audited financial statements included
elsewhere in this Prospectus. The balance sheet data at December 31, 1994 and
1995 is derived from financial statements that have been audited by Coopers &
Lybrand L.L.P. that are not included in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
MAY 17, 1994 MAY 17, 1994
(DATE OF YEARS ENDED (DATE OF
INCEPTION) TO DECEMBER 31, INCEPTION) TO
DECEMBER 31, ------------------------- DECEMBER 31,
1994 1995 1996 1997 1997
------------- ------- ------- ------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Costs and expenses:
Research and
development........... $ 707 $ 3,307 $ 5,399 $ 6,401 $ 15,814
General and
administrative........ 141 625 1,047 2,065 3,878
----- ------- ------- ------- --------
Loss from operations.... (848) (3,932) (6,446) (8,466) (19,692)
Interest income, net.... 96 280 337 475 1,188
----- ------- ------- ------- --------
Net loss................ $(752) $(3,652) $(6,109) $(7,991) $(18,504)
===== ======= ======= ======= ========
Pro forma net loss per
common share and per
common share--assuming
dilution(1)............ $ (0.92)
=======
Shares used in
calculation of pro
forma net loss per
common share and per
common share--assuming
dilution(1)............ 8,714
=======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1994 1995 1996 1997
------ ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................. $4,552 $6,803 $11,110 $11,457
Total assets................................. 4,910 7,685 11,951 13,141
Long-term liabilities........................ 99 423 596 2,325
Deficit accumulated during the development
stage....................................... (752) (4,404) (10,513) (18,503)
Total stockholders' equity................... 4,568 6,593 10,238 8,463
</TABLE>
- --------
(1) See Note 11 of Notes to Consolidated Financial Statements for an
explanation of the computation of pro forma net loss per share.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere
in this Prospectus.
OVERVIEW
Since its inception in May 1994, Symphonix has been a development stage
company. The Company is developing a family of proprietary semi-implantable
and implantable soundbridges for the management of moderate to severe hearing
impairment. The Company's family of Vibrant soundbridges are based on its
patented core FMT technology. The Company has not generated any revenue from
sales of products and as of December 31, 1997, had an accumulated deficit of
$18.5 million. To date, the Company's principal sources of funding have been
private equity financings, equipment leases and bank borrowings.
In September 1996, the Company initiated clinical trials of the Vibrant
soundbridge in both the United States and Europe, and in July 1997, the
Company initiated clinical trials of the Vibrant P soundbridge in Europe. The
Company will be required to conduct further research, development, testing and
regulatory activities. The costs of these activities, together with the costs
of establishing commercial-scale manufacturing and sales and marketing
capabilities, and general and administrative expenses, are expected to result
in substantial losses through at least 1999.
RESULTS OF OPERATIONS
Research and Development Expenses. Research and development expenses were
$707,000 in the period ended December 31, 1994, and $3.3 million, $5.4 million
and $6.4 million in the years ended December 31, 1995, 1996 and 1997,
respectively. Research and development expenses consist primarily of personnel
costs, professional services, materials, supplies and equipment in support of
product development, clinical trials, regulatory submissions and patent
applications. Expenses increased from the period ended December 31, 1994 to
the year ended December 31, 1995, due to the inclusion of a full year of
expenses in 1995, and to increases in the level of staffing, professional
services, and other costs as the Company established a research and
development organization and initiated its product development effort.
Expenses increased from 1995 to 1996 and from 1996 to 1997, due to increases
in the level of staffing and increased spending on supplies, professional
services and equipment as the Company increased its product development
efforts, developed its clinical research and regulatory functions, initiated
clinical trials of its products and established a pilot manufacturing
capability.
General and Administrative Expenses. General and administrative expenses
were $141,000 in the period ended December 31, 1994, and $625,000, $1.0
million and $2.1 million in the years ended December 31, 1995, 1996 and 1997,
respectively. General and administrative expenses consist primarily of
personnel costs and professional services. Expenses increased from the period
ended December 31, 1994 to the year ended December 31, 1995, due to the
inclusion of a full year of expenses in 1995, and to increases in the level of
staffing as the Company increased its product development activities. Expenses
increased from 1995 to 1996 and from 1996 to 1997, due to further increases in
the level of staffing and spending on professional services.
22
<PAGE>
Deferred compensation of $2.3 million was recorded in 1997, representing the
difference between the exercise prices of certain options granted and the
deemed fair value of the Company's Common Stock on the grant dates. Deferred
compensation expense of $191,000 attributed to such options was amortized
during the year ended December 31, 1997. The remaining deferred compensation
will be amortized over the vesting period of the options (generally four
years).
Interest Income, Net. Interest income, net was $96,000 in the period ended
December 31, 1994, and $280,000, $337,000 and $475,000 in the years ended
December 31, 1995, 1996 and 1997, respectively. The increases in interest
income over these periods were primarily due to the Company's increasing
average cash and short-term investment balances, which have been the result of
the timing of the Company's private equity financings.
Income Taxes. As a result of the net losses incurred, the Company has not
incurred any income tax obligations. At December 31, 1997, the Company had net
operating loss carryforwards of $13.2 million for federal and $13.1 million
for state income tax purposes, which will expire at various dates through 2012
if not utilized. The principal differences between losses for financial and
tax reporting purposes are the result of the capitalization of research and
development and start-up expenses for tax purposes. United States and state
tax laws contain provisions that may limit the net operating loss
carryforwards that can be used in any given year, should certain changes in
the beneficial ownership of the Company's shares occur. Such events could
limit the future utilization of the Company's net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operations and its capital
investments from the private sale of equity securities, totaling $26.7
million, from equipment lease financing totaling $1.3 million and from bank
borrowings totaling $2.0 million. At December 31, 1997, the Company had
$9.6 million in working capital, and its primary source of liquidity was $11.5
million in cash, cash equivalents and short-term investments.
Capital expenditures, primarily related to the Company's research and
development and manufacturing activities, were $294,000 in the period ended
December 31, 1994, and $691,000, $409,000 and $898,000 in the years ended
December 31, 1995, 1996 and 1997, respectively. At December 31, 1997, the
Company did not have any material commitments for capital expenditures, except
as set forth below.
In October 1997, the Company entered into a five-year lease commencing in
January 1998 for a new facility (see Note 7 of Notes to Consolidated Financial
Statements). The Company anticipates that it will incur capital expenditures
of approximately $1.0 million for leasehold improvements with respect to this
facility. Through December 31, 1997, approximately $350,000 has been incurred
and the balance is expected to be incurred in the first quarter of 1998.
The Company has a loan agreement with a bank providing for borrowings of up
to $2.0 million and for the issuance of letters of credit up to $250,000. At
December 31, 1997 the Company had borrowings of $2.0 million and an
outstanding letter of credit in the amount of $243,680 under the loan
agreement (see Note 6 of Notes to Consolidated Financial Statements).
Cash used in operating activities was $519,000 in the period ended December
31, 1994 and $3.1 million, $5.4 million and $6.5 million in the years ended
December 31, 1995, 1996 and 1997, respectively. The increases in cash used in
operating activities over these periods reflect the increased net losses
incurred, primarily as a result of higher research and development expenses.
The Company will expend substantial funds in the future for research and
development, preclinical and clinical testing, capital expenditures and the
manufacturing, marketing and sale of its products. The timing and amount of
spending of such capital resources cannot be accurately
23
<PAGE>
predicted and will depend upon several factors, including the progress of its
research and development efforts and preclinical and clinical activities,
competing technological and market developments, the time and costs of
obtaining regulatory approvals, the time and costs involved in filing,
prosecuting and enforcing patent claims, the progress and cost of
commercialization of products currently under development, market acceptance
and demand for the Company's products if approved for marketing and other
factors not within the Company's control. While the Company believes that the
net proceeds of this offering, together with its existing capital resources
and projected interest income, will be sufficient to fund its operations and
its capital investments for at least the next 18 months, there can be no
assurance that the Company will not require additional financing prior to that
time. There can be no assurance that such additional financing will be
available on a timely basis on terms acceptable to the Company, or at all, or
that such financing will not be dilutive to stockholders. If adequate funds
are not available, the Company could be required to delay development or
commercialization of certain of its products, to license to third parties the
rights to commercialize certain products or technologies that the Company
would otherwise seek to commercialize for itself, or to reduce the marketing,
customer support or other resources devoted to certain of its products, any of
which could have a material adverse effect on the Company's business,
financial condition and results of operations.
24
<PAGE>
BUSINESS
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors," and
elsewhere in this Prospectus.
OVERVIEW
Symphonix is a developer of proprietary semi-implantable and implantable
products, or soundbridges, for the management of moderate to severe hearing
impairment. In 1994, mild to severe hearing impairment affected approximately
26 million people in the United States, or 10% of the population, of whom
approximately 17 million people were classified as moderately or severely
hearing impaired. The Company believes that its family of Vibrant
soundbridges, designed to overcome the inherent limitations of traditional
hearing devices, represent a novel approach in the management of hearing
impairment. The Company's initial product under development, the Vibrant
soundbridge, is a semi-implantable device which mechanically drives the three
small bones of the middle ear to overcome the user's hearing impairment. The
Company's second generation product, the Vibrant P soundbridge, provides a
greater degree of customization to address the specific needs of a particular
user's hearing loss and expands the types of hearing loss that can be managed
by the Company's products. In September 1996, the Company initiated clinical
trials of the Vibrant soundbridge in both the United States and Europe, and in
July 1997 the Company initiated clinical trials of the Vibrant P soundbridge
in Europe. As of February 6, 1998, 50 patients have been implanted with the
Company's soundbridges, of whom 47 have had the Audio Processor fitted and the
soundbridge's performance evaluated.
THE HEARING IMPAIRMENT MARKET
Background
The human ear consists of three regions: the outer ear, the middle ear and
the inner ear. The outer ear consists of the external auricle and the ear
canal. The ear canal is a passageway through which sound waves reach the
middle ear. The outer ear is separated from the middle ear by the tympanic
membrane, commonly referred to as the eardrum. The middle ear is a chamber
that contains three tiny bones, the malleus, the incus, and the stapes, that
together are known as the ossicles. The ossicles form a chain from the
tympanic membrane to the inner ear. The inner ear includes the cochlea, which
is a fluid-filled structure that contains a large number of delicate sensory
hair cells that are connected to the auditory nerve.
Sound, which is a wave-like vibration of the air, enters the ear canal and
is slightly amplified by the natural resonant characteristics of the ear
canal. These sound waves cause vibration of the tympanic membrane and are
amplified and transmitted to the fluid filling the inner ear by the motion of
the ossicles. The waves created in the fluid pass through the snail-shaped
cochlea and stimulate the delicate sensory hair cells. These hair cells
generate electrochemical signals that are detected by the auditory nerve and
are then subsequently interpreted by the brain as sound.
The signals that are interpreted by the brain as sound are distinguished by
frequency and intensity. The frequency of sound is perceived as pitch and is
measured in cycles per second, or Hertz ("Hz"). The normal human ear perceives
sounds in the range of 20 to 18,000 Hz, although most components of human
speech are generally in the range of 400 to 4,000 Hz. A more subtle aspect of
frequency is that certain letters of the alphabet are spoken at a different
frequency than others. For example, certain consonants such as "m," "n" and
"g" and all vowels are spoken at relatively low frequencies while other
consonants and sounds such as "t," "s," "f" and "sch" are spoken at higher
frequencies. Accordingly, at a given volume, certain letters may be more
audible than others.
25
<PAGE>
The intensity of sound is perceived as loudness and is measured in decibels
("dB"). The lowest level of intensity at which an individual perceives sound
is known as the threshold of hearing. The range in decibels from a person's
threshold of hearing to the level at which the person perceives sound to be
uncomfortably loud is known as the dynamic range. Both the threshold of
hearing and the dynamic range vary with the frequency of sound. An individual
with normal hearing can comfortably hear sounds ranging in intensity from
approximately 30 dB to 100 dB.
[ILLUSTRATION OF EAR ANATOMY]
Hearing Impairment
Hearing impairment can adversely effect a person's quality of life and
psychological well-being. Hearing impaired people often withdraw from
discussions and other social interactions to avoid frustration and
embarrassment from not being able to fully participate in and understand
conversations. Difficulty in communicating effectively can lead to negative
emotions and attitudes, increased stress levels, reduced self-confidence,
reduced sociability and reduced effectiveness in the workplace. In addition,
recent studies suggest that hearing impairment may also contribute to
physiological complications, such as heart disease.
Audiologists typically classify the hearing impaired population into four
categories: mild, moderate, severe and profound. In 1994, the total hearing
impaired population in the United States was approximately 26 million people,
of whom approximately 17 million were classified as either moderately or
severely hearing impaired.
While the exact causes of hearing impairment are varied and unclear, hearing
impairment can be characterized according to its physiological source. There
are two general categories of hearing impairment, conductive and
sensorineural, although sometimes a combination of the two may arise.
Conductive hearing impairment results from diseases or disorders that limit
the transmission of sound through the outer and/or middle ear. Conductive
hearing impairment is often treated surgically with an implanted prosthesis to
replace part or all of the ossicles. The Company believes that people with a
conductive hearing loss represent a small portion of the total hearing
impaired population.
26
<PAGE>
Sensorineural hearing impairment occurs in the inner ear and/or neural
pathways and, the Company believes, accounts for the vast majority of hearing
impairment. In patients with sensorineural hearing impairment, the external
and middle ear function normally. The sound vibrations pass undisturbed
through the eardrum and ossicles, and fluid waves are created in the cochlea.
However, because some or many of the delicate sensory hair cells inside the
cochlea have degenerated or been damaged, the inner ear cannot detect the full
intensity and quality of the sound. Sensorineural hearing impairment typically
occurs as a result of aging or exposure to loud noise over a protracted period
of time.
As people age, their level of hearing deteriorates and the dynamic range of
audible frequencies is compressed, especially at the higher frequencies. While
approximately 10% of the United States population is hearing impaired, based
on 1994 data, this percentage increases to an average of approximately 25% for
individuals over 55 years of age. The Company believes that with the growth
and aging of the population, the hearing impaired population will continue to
increase throughout the industrialized world. With the increasing exposure to
noise in modern society, it has been observed that people may experience noise
induced hearing loss from aircraft, automobiles, lawn mowers and high powered
stereo equipment as well as military service and machinery within the
workplace.
Existing Therapies
The traditional approaches to management of sensorineural hearing impairment
have been the use of hearing aids and cochlear implants. Hearing aids are the
most common devices used to manage mild to severe sensorineural hearing
impairment. Cochlear implants have been used for the narrow segment of the
sensorineural market represented by profound hearing impairment. However, both
approaches have significant limitations in addressing their respective
markets.
Hearing Aids. The following table, based upon 1996 and 1997 articles in the
Hearing Journal, illustrates the ownership of traditional hearing aids by the
hearing impaired population in 1994. Approximately 18% of the hearing aid
owners did not use their device.
<TABLE>
<CAPTION>
TYPE OF HEARING IMPAIRED HEARING AID MARKET
HEARING POPULATION OWNERS PENETRATION OF
IMPAIRMENT (MILLIONS) (MILLIONS) HEARING AIDS
------------------------------------------------------------
<S> <C> <C> <C>
Mild 8.0 0.3 4%
Moderate 13.2 2.9 22%
Severe 3.9 2.0 51%
Profound 1.1 0.4 36%
---- ---
Total 26.2 5.6 21%
</TABLE>
Hearing aids are acoustic drive devices that amplify sound to increase the
movement of the tympanic membrane and thereby indirectly vibrate the ossicles
in an attempt to overcome the decrease in sensitivity of the delicate sensory
hair cells inside the cochlea. The first electrically enhanced hearing aid was
invented about a hundred years ago and consisted of a microphone, amplifier,
battery and speaker. More recently, hearing aid manufacturers have increased
the sophistication of sound processing, often using digital technology, to
provide features such as programmability and multi-band compression, allowing
different degrees of amplification at different frequencies. Hand-held
programmers have also been developed to compensate for the inability of
hearing aids to adequately process sound in a variety of acoustic
environments. In addition, as technology has enabled greater miniaturization,
less obtrusive hearing aids have become available. Although there have been
continued advancements in hearing aid device technology, for optimal
27
<PAGE>
performance all or part of the device must fit tightly in the ear canal, which
results in significant drawbacks, including the following:
Distorted sound quality. Obstructing the ear canal with either all or part
of the hearing aid creates an effect known as occlusion, where outside
sounds such as music are overwhelmed by internal sounds such as breathing
or talking. Because the ear canal's natural resonance is significantly
altered, the resulting sound can be unnatural and highly distorted.
Acoustic feedback. Feedback is a high pitched squeal which results when a
speaker and microphone are placed in close proximity and the sound from the
speaker is loud enough to be picked up by the microphone. The problem of
feedback is magnified since the volume of these devices must be turned up
to not only compensate for the patient's hearing impairment but to overcome
the reduction in sound caused by the blockage of the ear canal by the
hearing aid. In addition, as hearing aids have been manufactured in smaller
configurations, the problem of feedback has become inherently greater due
to the closer proximity of the speaker to the microphone.
Poor localization. Occlusion also results in the inability to differentiate
the direction of sounds, as well as the inability to adequately
differentiate between background noise and more important sounds, such as
conversation.
Social stigma. Many hearing aid users and potential users perceive a strong
social stigma related to wearing a hearing aid.
Discomfort. Hearing aids have been manufactured in smaller configurations
in an attempt to address the perceived social stigma associated with
wearing these devices. Since a tight fitting ear piece is required for
optimal performance, the smaller versions of these devices must be placed
deeper in the ear canal, which can cause substantial discomfort.
Reliability. Hearing aids require frequent maintenance, in part due to
their placement in the ear canal, where ear wax can cause problems with the
speaker or dampen the sound produced by the hearing aid. Hearing aids
generally have to be replaced every three or four years, either because of
loss, damage or obsolescence. The need for periodic replacement increases
the lifetime cost of wearing a hearing aid. Traditionally, most hearing aid
users have paid for these devices directly.
As a result of these problems, the benefits perceived by hearing aid users
are generally very low. An article in the 1996 Hearing Journal reported that
only approximately 53% of all hearing aid users are satisfied. Reflecting this
low level of user satisfaction, in 1996 hearing aid manufacturers experienced
product return rates ranging from 14% to 26%. Despite the inherent limitations
of hearing aids, in 1995, approximately 1.7 million hearing aids were sold in
the United States, representing a retail market of approximately $1.2 billion.
The United States market represents approximately 38% of the worldwide hearing
aid market. The Company estimates that the worldwide retail market for hearing
aids exceeded $3.0 billion in 1995.
Cochlear Implants. Cochlear implants have been developed for people who have
a profound hearing loss and are essentially deaf. The cochlear implant is
inserted into the inner ear in a highly invasive and non-reversible surgery.
The implant electrically stimulates the auditory nerve through an electrode
array that provides audible cues to the user which are not interpreted by the
brain as normal sound. Instead, these cues have to be interpreted by the user,
and primarily aid in lipreading and alerting the user to very loud or
dangerous sounds. Users generally require intensive and extended counseling
and training following surgery to achieve any benefit. Best results are
achieved with adults whose hearing loss develops later in life or with
children. Cochlear implants have been controversial both because of strong
resistance from portions of the deaf community and because of the irreversible
nature of the surgery in which the cochlea is invaded and any residual hearing
is destroyed. Accordingly, the Company does not believe that cochlear implants
will achieve significant market penetration beyond their initial indication of
profound hearing impairment. The Company estimates that, in 1996, the
worldwide market for cochlear implants was under $100 million.
28
<PAGE>
THE SYMPHONIX SOLUTION
The Company is developing a family of proprietary semi-implantable and
implantable products, or soundbridges, for the management of moderate to
severe hearing impairment. The Company's family of Vibrant soundbridges is
based on its patented core technology, the Floating Mass Transducer ("FMT").
The FMT is a tiny transducer that is designed to enhance hearing by precisely
mimicking and amplifying the movements of the ossicles by converting sound
into mechanical vibrations. While conventional approaches have indirectly
driven the ossicles by amplifying sound to increase the vibrations of the
tympanic membrane, the FMT is attached directly to the ossicles and enhances
the natural movement of these vibratory structures. This in turn generates
enhanced stimulation of the delicate sensory hair cells in the inner ear. The
FMT receives electrical signals from an Audio Processor, which picks up sound
from the environment and converts these sounds into electrical signals. The
Audio Processor transmits the signals to an implant under the skin. As a
result, the ear canal is not obstructed, the natural resonance of the ear is
maintained and an amplified, natural sound quality is achieved.
The Company's soundbridges are implanted in a two hour surgery that can be
performed on an outpatient basis utilizing the techniques which are similar to
those employed in routine otologic procedures. Based on preclinical studies,
the Company believes that the surgical procedure can be reversed without
clinically meaningful damage to the patient's residual hearing. The Company
believes that its family of Vibrant soundbridges offers a number of
significant benefits, including:
Improved sound quality and speech intelligibility. By leaving the ear canal
unobstructed and the natural resonance undisturbed, a more natural sound
quality is obtained over a broader range of frequencies, and the user's
ability to understand speech is expected to be greater.
Elimination of acoustic feedback. Since the Vibrant soundbridge
mechanically drives the ossicles, it does not generate any acoustic
feedback.
Improved sound localization. Users are able to comprehend the acoustic
sound environment, identify specific sounds and their source and
differentiate sounds from background noise.
Minimized social stigma. In the semi-implantable versions of the Company's
soundbridges, the only external component is located behind the ear and
generally hidden by the user's hair. As a result, social stigma is
minimized. The totally implantable versions of the Company's soundbridges
are being designed with no external components, and aesthetic
considerations would be completely eliminated.
Improved comfort. No part of the Vibrant soundbridge is inserted in the ear
canal, resulting in increased comfort for users of the Vibrant soundbridge.
Improved reliability. Since no components of the Vibrant soundbridge will
be within the ear canal, the reliability problems caused by wax and
moisture are eliminated.
Since the Company has not yet commercialized its products and since there
are no comparable direct drive devices currently available commercially, the
price that will be charged for the Vibrant soundbridge has not yet been
determined. However, the Company anticipates that the Vibrant soundbridge will
cost more than a sophisticated hearing aid (which can cost as much as $3,500),
but substantially less than a cochlear implant (the cost of which ranges from
approximately $17,000 to $30,000). The Company anticipates that surgical
procedure utilized in implanting the Vibrant soundbridge will cost
approximately $5,000 and will vary by geographic region.
29
<PAGE>
STRATEGY
The Company's objectives are to establish its family of Vibrant soundbridges
as the standard of care worldwide for the management of moderate to severe
hearing impairment and to establish Symphonix as the leading company in the
hearing management market. The following are key elements of the Company's
strategy:
Demonstrate improved quality of life. The Company intends to promote the
potential benefits of its products to the hearing impaired population in
order to expand the market to include not only current dissatisfied hearing
aid users but also former users who have abandoned hearing aids due to
either previous dissatisfaction or perceived social stigma. The Company
believes that achieving real patient benefit in the form of improved
quality of life will be an important factor in differentiating its products
from the traditional approaches to hearing management.
Develop surgeon endorsement of the Company's family of soundbridges. The
Company intends to position the family of Vibrant soundbridges as
technologically advanced implants that address an unmet patient need and
add to the products and services that surgeons can offer. The Company's
strategy is to market its soundbridges initially to those specialists in
otology who are currently most active in ear surgery and, thereafter, to
the general population of ENT surgeons. Because the surgical procedure for
implementing the Vibrant soundbridge utilizes many of the same techniques
employed by surgeons trained and experienced in cochlear implant surgery,
the Company believes that surgeon training will not be a significant
impediment to market acceptance.
Leverage the Company's patented core technology. The Company intends to
leverage its patented core FMT technology to develop new soundbridges and
enhancements to its current technology. The Company intends to continue to
dedicate significant resources to research and development to further
develop its technology base and to expand the market it addresses through
development of a family of alternate configurations of soundbridges. The
Company is developing the Vibrant P soundbridge to permit a greater degree
of customization to address the specific needs of a particular patient, the
Vibrant D soundbridge to permit an even greater degree of customization
along with the additional benefit of digital signal processing, and the
Vibrant HF soundbridge to provide a benefit suited to those individuals who
have a noise-induced hearing loss at high frequencies but relatively normal
hearing at lower frequencies.
Protect and enhance the Company's proprietary position. The Company intends
to continue to aggressively pursue proprietary protection for its
technologies and products. The Company has three patents issued in the
United States and 21 patents pending both in the United States and
internationally covering a number of fundamental aspects of the FMT and
related technologies.
PRODUCTS UNDER DEVELOPMENT
Symphonix is developing proprietary semi-implantable and implantable
soundbridges, utilizing the Company's core FMT technology to manage hearing
impairment. The Company believes that the Vibrant soundbridge, Vibrant P
soundbridge, Vibrant HF soundbridge and Vibrant D soundbridge will enable the
Company to address a significant portion of the moderate to severe hearing
impairment market currently not satisfied with traditional hearing aid devices.
The Vibrant XP soundbridge has the potential to enable the Company to address a
portion of the profound hearing impairment market currently served by cochlear
implants. In addition, the Company is in the early stage of developing the
Vibrant TI which is being designed to be totally implantable with no external
components.
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<PAGE>
The Vibrant soundbridge, Vibrant P soundbridge, Vibrant HF soundbridge and
Vibrant D soundbridge are designed to utilize the same implant, with the
differences in function being provided by modifications to the external Audio
Processor, its software and programming unit. Utilization of a common implant
will allow a user to upgrade the Audio Processor if a user's hearing changes
over time.
The following table sets out the soundbridges under development by the
Company and their development status:
<TABLE>
<CAPTION>
SOUNDBRIDGE DESCRIPTION HEARING LOSS ADDRESSED STATUS(1)(2)
- ---------------------------------------------------------------------------------------
<C> <S> <C> <C>
Vibrant First generation semi- Moderate to IDE approved for
implantable hearing moderately severe pivotal trial in the
device. United States; EN 540
clinical trial
complete in Europe
- ---------------------------------------------------------------------------------------
Vibrant P Second generation semi- Moderate to severe
implantable hearing IDE approved for
device, with pivotal trial in the
programmable dual-band United States; EN 540
analog signal clinical trial
processing. complete in Europe
- ---------------------------------------------------------------------------------------
Vibrant HF Second generation semi- Noise-induced high IDE expected to be
implantable hearing frequency loss submitted in 1998
device designed to
address noise induced
high frequency hearing
loss, by using modified
signal processing.
- ---------------------------------------------------------------------------------------
Vibrant D Third generation semi- Moderate to severe
implantable hearing IDE supplement
device, with expected to be
programmable 3-band submitted in the
digital signal fourth quarter of
processing. 1998
- ---------------------------------------------------------------------------------------
Vibrant XP Second generation semi- Severe to profound Limited feasibility
implantable hearing study expected to be
device designed to performed in 1998
address more severe
hearing impairment by
using modified signal
processing and an
external battery in a
body-worn pack, coupled
with a modified implant.
- ---------------------------------------------------------------------------------------
Vibrant TI A second family of Moderate to severe Early stage of
Vibrant soundbridges development
which are being designed
to be totally
implantable with no
external components.
</TABLE>
(1) Regulatory filing dates reflect the Company's plans and are subject to
delay or cancellation depending upon contingencies that may arise in the
development process. See "Risk Factors--Limited Clinical Testing
Experience" and "--Limited Manufacturing Experience; Scale-Up Risk;
Dependence on Key Suppliers."
(2) "EN 540" indicates European clinical trial standards to determine the
safety and performance of products.
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<PAGE>
Vibrant soundbridge
The Company's initial product under development, the Vibrant soundbridge,
has both external and implantable components. The external Audio Processor
consists of (i) a microphone that picks up sound from the environment, (ii)
sound processing circuitry that converts the sound to an electronic signal and
modulates the signal to reduce potential noise interference from broad band
electromagnetic fields and (iii) a small 1.5 volt battery that powers the
device. The Audio Processor is placed on the skull behind the ear and is held
in place by magnetic attraction to an implanted receiver, the VORP (Vibrating
Ossicular Prosthesis). The Audio Processor is small enough to be concealed by
the user's hair.
[ILLUSTRATION OF VIBRANT SOUNDBRIDGE IN PLACE]
The VORP converts the electronic signal to a mechanical vibration of the
ossicles in the middle ear. The VORP consists of (i) a receiver unit that
receives the electromagnetic signal through the skin from the external Audio
Processor and breaks down the electrical signal to the appropriate drive
signal for the FMT, (ii) a conductor link that connects the implanted receiver
unit to the FMT and (iii) the FMT itself, which is attached to the incus using
a titanium clip. All of these components are insulated from body chemistry
using well established implantable device materials used in pacemaker and
implantable defibrillator systems.
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<PAGE>
The FMT is a tiny transducer, smaller than a grain of rice, that comprises a
floating magnet contained within a titanium housing. A coil surrounding the
housing generates a small electromagnetic field based on a signal received
from the VORP's receiver unit. The electromagnetic interaction of the magnet
and the coil creates a mechanical vibration of the entire FMT. This vibration
enhances the natural movement of the ossicles, which in turn generates
enhanced stimulation of the delicate sensory hair cells in the inner ear. A
critical element of the proprietary FMT design is the proximity of the magnet
to the electromagnetic field that causes the magnet to vibrate. By keeping the
magnet and the coil close together, the FMT maximizes electromagnetic coupling
while minimizing power consumption.
[LOGO OF PRODUCT ILLUSTRATION APPEARS HERE]
The surgical procedure for the implantation of the Vibrant soundbridge
involves techniques which are similar to those employed in other common
otologic procedures. The internal receiver unit is implanted below the skin
and muscle behind the ear. The conductor link connecting the receiver unit to
the FMT is placed through the excavated mastoid bone. These steps are similar
to those required for the surgical placement of a cochlear implant receiver.
In the middle ear, the FMT is attached to the ossicles in a manner similar to
the way otologists have traditionally attached ossicular prostheses for
management of conductive hearing loss. Because the surgery involves surgical
techniques that are familiar to ear surgeons, the Company believes that
surgeon training will not be a significant impediment to market acceptance.
The procedure may be performed on an outpatient basis, and initial clinical
experience has indicated that the procedure can be performed in about two
hours. Approximately eight weeks following the surgery, the Audio Processor is
fitted by an audiologist with the appropriate sound processing settings. The
Company's approved IDE only permits implantation in one ear. This will
generally be the ear with the poorest unaided functional hearing. Based on
preclinical studies, the Company believes that the surgical procedure can be
reversed without damage to the patient's residual hearing.
Limited clinical trials of the Vibrant soundbridge were initiated in late
1996 in the United States. Also in late 1996, an EN 540 clinical trial was
initiated in Europe, which trial has subsequently been completed. The Company
has since submitted the technical, preclinical and clinical data that it
believes will be necessary, together with the previously obtained
certifications, to satisfy the applicable regulatory requirements for
commercial sales in the EU. As of January 5, 1998, five patients in the United
States have been implanted with the Vibrant soundbridge, all of whom have had
the Audio Processor fitted and the soundbridge's performance evaluated.
Additionally, 19 patients in Europe have been implanted with the Company's
Vibrant soundbridge, all of whom have had the Audio Processor fitted and the
soundbridge's performance evaluated.
Vibrant P soundbridge
The Vibrant P soundbridge under development is similar to the Vibrant
soundbridge but is designed to permit a greater degree of customization to
address the specific needs of a particular
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<PAGE>
user's hearing loss and expand the types of hearing loss that can be managed
by the Company's products. At the time of fitting, the Audio Processor is
connected to a hand-held programming unit which allows the audiologist to
adjust separately the low and high frequencies. This permits a greater degree
of customization in either the high or low frequency band.
The Company received approval to incorporate the Vibrant P soundbridge into
its current European clinical trial of the Vibrant soundbridge and this trial
was initiated in July 1997. In the United States, the Company filed an IDE
supplement on November 14, 1997 summarizing the Phase I results, finalizing
the study protocol and labeling claims, providing technical information
regarding the Vibrant P soundbridge, and requested permission to proceed to
the pivotal study. On December 11, 1997, the FDA approved the multi-center
pivotal study in 55 subjects at up to 12 sites with the Vibrant P soundbridge.
There can be no assurance that the Company's clinical trial effort will
progress as expected, will not be delayed or that such effort will lead to the
successful development of any product. As of February 6, 1998, 26 patients
have been implanted with the Vibrant P soundbridge in Europe, of whom 23 have
had the Audio Processor fitted and the soundbridge's performance evaluated.
Vibrant HF soundbridge
The Vibrant HF soundbridge is being developed to provide a benefit for those
individuals who have a hearing loss at high frequencies but relatively normal
hearing at lower frequencies. Hearing aids usually are limited in
effectiveness at higher frequencies due to acoustic feedback and internal
speaker response. With the increasing exposure to noise in modern society, it
has been observed that people may experience noise-induced hearing loss from
aircraft, automobiles, lawn mowers and high powered stereo equipment as well
as military service and machinery within the workplace. The Vibrant HF
soundbridge will be configured through selective signal processing. The
Company intends to submit an IDE in 1998 for FDA approval to commence clinical
trials of the Vibrant HF soundbridge and intends to initiate European clinical
trials in 1998.
Vibrant D soundbridge
The Vibrant D soundbridge under development is similar to the Vibrant P
soundbridge, but is designed to permit an even greater degree of customization
to address the specific needs of a particular user's hearing loss. The Vibrant
D soundbridge features digital signal processing. Fully automatic and
independent sound processing in three separate frequency bands is provided. At
the time of fitting, the Audio Processor is connected to a programming unit
which allows the audiologist to adjust separately the low, mid and high
frequencies. This sophisticated system will be capable of analyzing sound and
automatically adjusting the soundbridge's response.
The Company intends to seek approval of an IDE supplement for the Vibrant D
soundbridge during 1998 and to initiate European clinical trials in 1998.
There can be no assurance, however, that the Company will not be required to
submit a separate IDE for the Vibrant D soundbridge, which would result in a
delay in regulatory approval.
Vibrant XP soundbridge
The Vibrant XP soundbridge is being developed to provide a benefit for those
individuals who have a severe to profound hearing loss with speech recognition
above 30%. Currently, there are only limited treatment options for such
individuals.
The Vibrant XP soundbridge will be configured to provide modified signal
processing and higher output from the FMT, thereby providing additional
benefit for certain people with a severe to profound hearing impairment.
Generating this higher output will require an external body-worn
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<PAGE>
battery pack, similar to those used for cochlear implants. However, unlike
cochlear implants, the Vibrant XP soundbridge will not require penetration of
the inner ear with its attendant damage to residual hearing.
The Company intends to conduct a feasibility study in 1998 on a limited
number of patients in Europe to assess the viability of this product concept.
Based on the results of this feasibility study, the Company may seek approval
to initiate U.S. clinical trials of the Vibrant XP soundbridge by submitting
an IDE during 1998 and may initiate European clinical trials in 1998.
Vibrant TI soundbridge
The Company is in the early stages of developing versions of the Vibrant
soundbridge for the management of moderate to severe hearing impairment that
are totally implantable with no external components. The essential functions
of the core FMT technology of these products will be the same as in the semi-
implantable products. However, all the functions currently performed by the
external Audio Processor are being designed to be performed by implanted
components. The Company believes that the Vibrant TI soundbridge, if
successfully developed, will be applicable especially for people who are
particularly physically active or who are concerned about aesthetics.
Two critical elements of producing the Vibrant TI soundbridge are the
development of an implantable microphone that can adequately pick up sound
from the external environment, and the development of a transcutaneously
rechargeable battery to power the device. The microphone is being developed
internally by the Company and the battery is being developed under a
cooperative development project with a specialized battery manufacturer.
However, there can be no assurance that such components will be successfully
developed in a timely manner, if ever.
Since all of the Company's products are in development, significant revenues
from product sales will not be realized for at least several years, if ever.
There can be no assurance that any of the Company's product development
efforts will be successfully completed, that any of the Company's products
will be proven to be safe and effective, that regulatory approvals will be
obtained or labeling claims will be as broad as sought, that the Company's
products will be capable of being produced in commercial quantities with
acceptable yields at reasonable costs, or that any products, if introduced,
will achieve market acceptance.
CLINICAL TRIAL ACTIVITIES
United States
On February 23, 1996, the Company received approval of an IDE for the
Vibrant soundbridge from the FDA. The Company has completed a Phase I trial
under the IDE and submitted the interim report to the FDA. This trial was
limited to five subjects, including Geoffrey R. Ball, a founder of the
Company, at two investigational sites and was intended to test the safety and
provide preliminary evidence of efficacy of the device and the surgical
procedures used to implant the device. Due to the limited number of subjects
evaluated, no statistically valid conclusions can be made from the results
reported to the FDA.
The Company observed the following performance characteristics: increased
functional gain at higher frequencies (i.e., >2000 Hz); elimination of
occlusion effect; elimination of acoustic feedback; elimination of placement
loss; reduction of maintenance issues; and elimination of ear mold issues. A
standardized hearing test was also administered to evaluate each subject's
ability to comprehend speech in a noisy environment. Three of the five
subjects demonstrated a 50% improvement with the Vibrant soundbridge compared
to their hearing aid. The trial included a self-assessment questionnaire of
improvement for the following seven categories of device performance as
compared to a hearing aid: communication, reverberation, familiar talker,
reduced cues, background noise, aversion to sounds and distortion of sounds.
Subjects reported an improvement greater than 20% in six of the seven
categories with the Vibrant soundbridge when compared to their current hearing
aid.
35
<PAGE>
On November 14, 1997, the Company filed an IDE supplement summarizing the
Phase I results, finalizing the study protocol and labeling claims, providing
technical information regarding the Vibrant P soundbridge, and requested
permission to proceed to the pivotal study. On December 11, 1997, the FDA
approved the multi-center pivotal study in 55 subjects at up to 12 sites with
the second generation Vibrant P soundbridge.
Europe
The Company has conducted a multi-center EN 540 clinical trial in Europe at
seven institutions. Clinical sites were located in Germany, Italy, the
Netherlands, the United Kingdom, Switzerland and France. The EN 540 protocol
investigated the safety and performance of the Vibrant soundbridge and the
Vibrant P soundbridge. As of February 6, 1998, 45 subjects have been implanted
with the Company's soundbridges, 19 with the Vibrant soundbridge and 26 with
the Vibrant P soundbridge. With the Vibrant soundbridge, performance was only
evaluated for functional gain and the results were comparable to those
achieved by the subjects in the United States trial. With the Vibrant P
soundbridge, the subjects demonstrated functional gains as high as 50 dB at
1000 Hz, 55 dB at 1500 Hz, 60 dB at 2000 Hz, 40 dB at 3000 Hz, 50 dB at
4000 Hz, 40 dB at 6000 Hz, and 35 dB at 8000 Hz. These functional gain values
reported were at "user settings" and did not necessarily reflect the maximum
functional gains attainable with the device.
There can be no assurance that the Company's clinical trial efforts will
progress as expected, not be delayed or that such efforts will lead to the
successful development of any product. No assurance can be given that any of
the Company's proposed clinical trials will continue to be allowed by the FDA
or other regulatory agencies or that clinical trials will commence as planned.
Any delays in the Company's clinical trials would have a material adverse
effect on the Company's business, financial condition and results of
operations. Success in preclinical studies or early stage clinical trials does
not assure success in later stage clinical trials. Data obtained from
preclinical and clinical activities are susceptible to varying interpretations
which could delay, limit or prevent regulatory approval. Further, there can be
no assurance that if such testing of products under development is completed,
any such devices will be accepted for formal review by the FDA or approved by
the FDA for marketing in the United States.
RESEARCH AND DEVELOPMENT
The Company had 23 employees engaged in research and development, including
regulatory and clinical affairs, as of December 31, 1997. The Company's
research and development has focused on developing its patented core FMT
technology, developing the Vibrant soundbridge and conducting appropriate
preclinical and clinical testing. The Company expended approximately $5.4
million and $6.4 million for the years ended December 31, 1996 and 1997,
respectively, on research and development, and anticipates that it will
continue to expend substantial resources on completion of the clinical testing
of the Vibrant and Vibrant P soundbridges, development and clinical testing of
the Vibrant HF and Vibrant D soundbridges, and supporting manufacturing scale-
up. In addition, the Company expects to devote substantial resources to the
development of the Vibrant XP soundbridge and of the Vibrant TI soundbridge
family of totally implantable versions of the Vibrant soundbridge. In
addition, the Company may devote resources for the development of products for
the treatment of conductive hearing loss. Product development involves a high
degree of risk and there can be no assurance that the Company's product
development efforts will result in any commercially successful products.
MANUFACTURING
The Company currently manufactures its products in limited quantities for
laboratory testing and for its United States and European clinical trials. The
manufacture of the Company's soundbridges is
36
<PAGE>
a complex operation involving a number of separate processes, components and
assemblies. Each device is assembled and individually tested by the Company.
The manufacturing process consists primarily of assembly of internally
manufactured and purchased components and subassemblies, and certain processes
are performed in an environmentally controlled area. After completion of the
manufacturing and testing processes, implantable devices are sterilized by a
sub-contracted supplier. The Company has no experience manufacturing its
products in the volumes or with the yields that will be necessary for the
Company to achieve significant commercial sales, and there can be no assurance
that the Company can establish high volume manufacturing capacity or, if
established, that the Company will be able to manufacture its products in high
volumes with commercially acceptable yields. If the Company receives
regulatory approval to commercialize its products, it will need to expend
significant capital resources and develop manufacturing expertise to establish
commercial-scale manufacturing capabilities. Furthermore, prior to approval of
a PMA, the Company's facilities, procedures and practices will be subject to a
pre-approval inspection by the FDA. The Company's inability to successfully
manufacture or commercialize its soundbridges in a timely matter could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Raw materials, components and subassemblies for the Company's soundbridges
are purchased from various qualified suppliers and are subject to stringent
quality specifications and inspections. The Company conducts quality audits of
its key suppliers, several of whom are experienced in the supply of components
to manufacturers of implantable medical devices, such as pacemakers,
defibrillators and drug delivery pumps. A number of components and
subassemblies, such as silicone, control electronics and implant packaging are
provided by single source suppliers. One component, the signal processing
microcircuit, is provided by a sole source supplier, Gennum Corporation. None
of the Company's suppliers is contractually obligated to continue to supply
the Company nor is the Company contractually obligated to buy from a
particular supplier. For certain of these components and subassemblies, there
are relatively few alternative sources of supply, and establishing additional
or replacement suppliers for such components and subassemblies could not be
accomplished quickly. In addition, if the Company wishes to significantly
modify its manufacturing processes or change the supplier of a critical
component, additional approvals will be required from the FDA before the
change can be implemented. Because of the long lead time for some components
and subassemblies that are currently available from a single source, a
supplier's inability or failure to supply such components or subassemblies in
a timely manner or the Company's decision to change suppliers could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Although the Company believes that its current facilities are sufficient to
meet its clinical manufacturing needs, before the Company commences
commercial-scale manufacturing operations, it intends to move to a new
facility. The Company has signed a lease on a new facility and is in the
process of constructing an environmentally controlled area and other leasehold
improvements in this building and expects to occupy the building in the first
quarter of 1998. This new facility, which will replace the current facility,
is necessary for the establishment of commercial-scale manufacturing.
The Company's manufacturing facilities are subject to periodic inspection by
regulatory authorities, and its operations must undergo QS regulation
compliance inspections conducted by the FDA and corresponding state agencies.
Additionally, prior to approval of a PMA, the Company's and its third-party
manufacturers' facilities, procedures and practices will be subject to pre-
approval QS regulation inspections. The Company has been inspected by the Food
and Drug Branch of the California Department of Health Services ("CDHS") and a
Device Manufacturing License has been issued to the Company. The Company will
be required to comply with the QS regulation requirements in order to produce
products for sale in the United States and with applicable quality system
standards and directives in order to produce products for sale in the EU. Any
failure of the Company to comply with the QS regulation or applicable
standards and directives may result in the Company being required to take
corrective actions, such as modification of its policies and
37
<PAGE>
procedures. Pending such corrective actions, the Company could be unable to
manufacture or ship any products, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
SALES, MARKETING AND TRAINING
The primary market for the Vibrant soundbridge is well defined and highly
concentrated. Of the approximately 8,000 ENT surgeons in the United States,
approximately 400 are specialists in otology. The Company's strategy is to
market its products initially to those specialists in otology who are
currently most active in ear surgery, and, subsequently, to the general
population of ENT surgeons. Because the surgical procedure for implementing
the Vibrant soundbridge utilizes many of the same techniques employed by
surgeons trained and experienced in cochlear implant surgery, the Company
believes that surgeon training will not be a significant impediment to market
acceptance.
The Company intends to position the family of Vibrant soundbridges as
technologically advanced implants that address an unmet patient need and add
to the products and services that surgeons can offer. Patients who have
traditionally been candidates for a hearing aid often are first seen by an ENT
surgeon, prior to being referred to a hearing device dealer or dispensing
audiologist. Accordingly, endorsement by the surgical community will be an
important goal of the Company's marketing programs. The Company will also seek
to develop a high degree of awareness by and endorsement from audiologists.
The Company intends to promote the benefits of its products to consumers in
order to expand usage to include not only those who are currently dissatisfied
with hearing aids, but also those who have abandoned hearing aids due to
either dissatisfaction or perceived social stigma.
Because the target market is quite concentrated, the Company believes that
it can address the market in the United States with a small direct sales
force. The Company is in the process of establishing a sales and marketing
organization in Europe. An office has been established in Basel, Switzerland,
where the Company's Director of European Sales and Marketing and European
Clinical Manager are based. The Company has recruited sales personnel to
provide direct sales coverage in Germany, France and the United Kingdom, who
will commence their employment during the first quarter of 1998. By the end of
the first quarter of 1998, the Company intends to establish distributors in
Italy, Spain and the Benelux countries. In other international markets,
including Japan, the Company will seek to establish a network of distributors.
There can be no assurance that the Company will be able to build a direct
sales force or marketing organization in any country, that establishing a
direct sales force or marketing organization will be cost-effective or that
the Company's sales and marketing efforts will be successful. In addition, the
Company has had discussions with only a limited number of potential
international distributors and has not yet entered into any agreements with
distributors. There can be no assurance that the Company will be able to enter
into agreements with qualified distributors on a timely basis on terms
acceptable to the Company, or at all, or that such distributors will devote
adequate resources to selling the Company's products.
COMPETITION
The medical device industry is subject to intense competition in the United
States and abroad. The Company believes its products will compete primarily
with the traditional approaches to managing hearing impairment, principally
hearing aids. Principal manufacturers of acoustic hearing aids include Siemens
Hearing Instruments, Inc., Philips Medical Systems North America Co., Starkey
Laboratories Inc., Beltone Electronics Corp., Dahlberg Inc., ReSound Corp.,
Oticon, Inc., Widex Hearing Aid Co., Inc. and Phonak Inc. There can be no
assurance that the Company's soundbridges will be able to successfully compete
with established hearing aid products. Although, to the Company's knowledge,
none of these acoustic hearing aid manufacturers are currently developing
38
<PAGE>
direct drive devices, there can be no assurance that these potential
competitors will not succeed in developing technologies and products in the
future that are more effective, less expensive than those being developed by
the Company or that do not require surgery. The Company is aware of several
university research groups and development-stage companies that have active
research or development programs related to direct drive sensorineural hearing
devices. Research of this type has been conducted at various sites for over 20
years. In addition, some large medical device companies, some of which are
currently marketing implantable medical devices, may develop programs in
hearing management. Certain of these companies have substantially greater
financial, technical, manufacturing, marketing and other resources than the
Company. In addition, there can be no assurance that certain of the Company's
competitors will not develop technologies and products that may be more
effective in managing hearing impairment than the Company's products or that
render the Company's products obsolete.
The Company believes that the primary competitive factors in the hearing
management market will be the quality of the hearing enhancement, safety,
whether surgery is required, reliability, endorsement by the surgeon and
audiology communities, patient comfort, cosmetic result and price. The Company
believes that it will be competitive with respect to these factors.
Nonetheless, because the Company's products are still under development, the
relative competitive position of the Company in the future is difficult to
predict.
The medical device industry is characterized by rapid and significant
technological change. Accordingly, the Company's success will depend in part
on its ability to respond quickly to medical and technological change and user
preference through the development and introduction of new products that are
of high quality and that address patient and surgeon requirements.
PATENTS AND PROPRIETARY TECHNOLOGY
In the United States, the Company holds three issued patents and 11 pending
patent applications. Additionally, the Company has ten pending foreign patent
applications. These patents and patent applications generally cover the
invention and application of the FMT as well as the specific application of
the FMT and other concepts in the field of hearing impairment. In addition,
the Company has licensed, on a royalty-free basis, a United States patent
covering the magnetic attachment of an external audio processor to an
implanted receiver. The Company's success will depend in part on its ability
to obtain patent protection for its products and processes, to preserve its
trade secrets, and to operate without infringing or violating the proprietary
rights of others.
The patent positions and trade secret provisions of medical device
companies, including those of the Company, are uncertain and involve complex
and evolving legal and factual questions. The coverage sought in a patent
application either can be denied or significantly reduced before or after the
patent is issued. Consequently, there can be no assurance that any patents
from pending applications or from any future patent application will be
issued, that the scope of the patent protection will exclude competitors or
provide competitive advantages to the Company, that any of the Company's
patents will be held valid if subsequently challenged or that others will not
claim rights in or ownership of the patents and other proprietary rights held
by the Company. Since patent applications are secret until patents are issued
in the United States or corresponding applications are published in other
countries, and since publication of discoveries in the scientific or patent
literature often lags behind actual discoveries, the Company cannot be certain
that it was the first to file patent applications for such inventions.
In addition, there can be no assurance that competitors, many of which have
substantial resources, will not seek to apply for and obtain patents that will
prevent, limit or interfere with he Company's ability to make, use or sell its
products either in the United States or in international markets. Although the
Company has conducted searches of patents issued to other companies,
39
<PAGE>
research or academic institutions or others, there can be no assurance that
such patents do not exist, have not been filed or could not be filed or
issued, which contain claims relating to the Company's technology, products or
processes. Patents issued and patent applications filed in the United States
or internationally relating to medical devices are numerous and there can be
no assurance that current and potential competitors and other third parties
have not filed or in the future will not file applications for, or have not
received or in the future will not receive, patents or obtain additional
proprietary rights relating to products or processes used or proposed to be
used by the Company. In addition, patent applications in foreign countries are
maintained in secrecy for a period after filing. Publication of discoveries in
the scientific or patent literature tends to lag behind actual discoveries and
the filing of related patent applications. There may be pending applications,
which if issued with claims in their present form, might provide proprietary
rights to third parties relating to products or processes used or proposed to
be used by the Company. The Company may be required to obtain licenses to
patents or proprietary rights of others. Further, the laws of certain foreign
countries do not protect the Company's intellectual property rights to the
same extent as do the laws of the United States. Litigation or regulatory
proceedings, which could result in substantial cost and uncertainty to the
Company, may also be necessary to enforce patent or other intellectual
property rights of the Company or to determine the scope and validity of other
parties' proprietary rights. There can be no assurance that the Company will
have the financial resources to defend its patents from infringement or claims
of invalidity.
The Company also relies upon trade secrets and other unpatented proprietary
technology, and no assurance can be given that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to or disclose the Company's proprietary technology or
that the Company can meaningfully protect its rights in such unpatented
proprietary technology. The Company's policy is to require each of its
employees, consultants, investigators and advisors to execute a
confidentiality agreement upon the commencement of an employment or consulting
relationship with the Company. These agreements generally provide that all
inventions conceived by the individual during the term of the relationship
shall be the exclusive property of the Company and shall be kept confidential
and not be disclosed to third parties except in specified circumstances. There
can be no assurance, however, that these agreements will provide meaningful
protection for the Company's proprietary information in the event of
unauthorized use or disclosure of such information.
Recently Public Law 104-208 was signed into law in the United States and
limits the enforcement of patents relating to the performance of surgical or
medical procedures on a body. This law precludes medical practitioners and
health care entities, who practice these procedures, from being sued for
patent infringement. Therefore, depending upon how these limitations are
interpreted by the courts, they could have a material adverse effect on the
Company's ability to enforce any of its proprietary methods or procedures
deemed to be surgical or medical procedures on a body. In certain other
countries outside the United States, patent coverage relating to the
performance of surgical or medical procedures is not available. Therefore,
patent coverage in such countries will be limited to the FMT or to narrower
aspects of the FMT.
The medical device industry in general has been characterized by substantial
litigation. Litigation regarding patent and other intellectual property
rights, whether with or without merit, could be time-consuming and expensive
to respond to and could distract the Company's technical and management
personnel. The Company may become involved in litigation to defend against
claims of infringement by the Company, to enforce patents issued to the
Company or to protect trade secrets of the Company. If any relevant claims of
third-party patents are held as infringed and not invalid in any litigation or
administrative proceeding, the Company could be prevented from practicing the
subject matter claimed in such patents, or would be required to obtain
licenses from the patent owners of each such patent, or to redesign its
products or processes to avoid infringement. In addition, in the
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event of any possible infringement, there can be no assurance that the Company
would be successful in any attempt to redesign its products or processes to
avoid such infringement or in obtaining licenses on terms acceptable to the
Company, if at all. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure by the Company to redesign its products
or processes or to obtain necessary licenses could prevent the Company from
manufacturing and selling its products, which would have a material adverse
effect on the Company's business, financial condition and results of
operations. Although the Company has not been involved in any litigation to
date, in the future, costly and time-consuming litigation brought by the
Company may be necessary to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company, or to determine the
enforceability, scope and validity of the proprietary rights of others.
GOVERNMENT REGULATION
The Company's medical products, such as the Vibrant soundbridge, are
regulated as medical devices. Accordingly, clinical trials, product
development, labeling, manufacturing processes and promotional activities are
subject to extensive review and rigorous regulation by government agencies in
most countries in which the Company will seek to commercialize its products.
United States
In the United States, the Company's products are subject to applicable
provisions of the United States Federal Food, Drug, and Cosmetic Act ("FDC
Act"), and other federal statutes and regulations governing, among other
things, the design, manufacture, testing, safety, labeling, storage, record
keeping, reporting, approval, advertising and promotion of medical devices.
Noncompliance with applicable requirements can result in warning letters,
fines, recalls or seizure of products, civil penalties, injunctions, total or
partial suspension of production, withdrawal of approval or refusal to approve
new marketing applications and criminal prosecution. Changes in existing
requirements or adoption of new requirements could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Pursuant to the FDC Act, the FDA regulates the design, manufacture,
distribution, preclinical and clinical study and approval of medical devices
in the United States. Medical devices are classified in one of three classes
(Class I, Class II or Class III) on the basis of the controls necessary to
reasonably assure their safety and effectiveness. Safety and effectiveness is
considered to be reasonably assured for Class I devices through general
controls (e.g., labeling, premarket notification and adherence to current QS
regulations) and for Class II devices through the use of additional special
controls (e.g., performance standards, post-market surveillance, patient
registries and FDA guidelines).
Generally, Class III devices are those which must receive premarket approval
by the FDA to reasonably assure their safety and effectiveness (e.g., life-
sustaining, life-supporting and implantable devices, or new devices which have
been found not to be substantially equivalent to legally marketed devices, or
devices whose safety and effectiveness cannot be reasonably assured through
general controls, even if supplemented by additional special controls). Active
implantable devices, such as the Company's implantable hearing devices, are
considered Class III devices.
Before a new device can be introduced to the market, the manufacturer
generally must obtain FDA clearance through a 510(k) Premarket Notification or
FDA approval through a PMA application. While the Company has no products for
which it expects to seek 510(k) clearance, it may file 510(k) submissions with
respect to future products. A 510(k) clearance will generally only be granted
if the information submitted to the FDA establishes that the device is
"substantially equivalent" to a legally marketed predicate medical device.
Frequently, the FDA will require clinical data in support of a 510(k)
submission, and the 510(k) process can become time-consuming and expensive.
Significant modifications of the labeling, manufacturing and design of any
product that has been cleared through
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the 510(k) process will require a new 510(k) Premarket Notification, if those
modifications could significantly affect the safety, effectiveness or intended
use of the device.
A PMA must be submitted if the device cannot be cleared through the 510(k)
process. A PMA must be supported by extensive data, including, but not limited
to, technical, preclinical, clinical trials, manufacturing, and labeling to
demonstrate the safety and effectiveness of the device. The Company believes
that all versions of the Vibrant soundbridge currently under development are
Class III devices and will require a PMA, as will future configurations of
implantable hearing devices.
Before the Company's products can be commercialized in the United States,
the Company must submit, in a PMA, extensive data on preclinical studies and
clinical trials, device design, manufacturing, labeling, promotion and
advertising, as well as other aspects of the product. In addition, the Company
must submit clinical data gathered in trials conducted under an IDE
demonstrating to the satisfaction of the FDA that the product is safe and
effective for its labeling claims, and obtain marketing approval from the FDA.
Phase I of the IDE study has been completed. Phase I was limited to two sites
and five subjects and was intended to test the safety and provide preliminary
evidence of the effectiveness of the device and the surgical procedure used to
implant the device. On November 14, 1997, the Company filed an IDE supplement
summarizing the Phase I results, finalizing the study protocol and labeling
claims, providing technical information regarding the Vibrant P soundbridge,
and requested permission to proceed to the pivotal study. On December 11,
1997, the FDA approved the multi-center pivotal study in 55 subjects at up to
12 sites with the second generation Vibrant P soundbridge. There can be no
assurance that the Company's clinical trial effort will progress as expected,
will not be delayed or that such effort will lead to the successful
development of any product. No assurance can be given that any of the
Company's clinical trials will continue to be allowed by the FDA or other
regulatory agencies or that clinical trials will commence as planned.
Any delays in the Company's clinical trials would have a material adverse
effect on the Company's business, financial condition and results of
operations. Success in preclinical studies or early stage clinical trials does
not assure success in later stage clinical trials. Data obtained from
preclinical and clinical activities are susceptible to varying interpretations
which could delay, limit or prevent regulatory approval. Further, there can be
no assurance that if such testing of products under development is completed,
any such devices will be accepted for formal review by the FDA, or approved by
the FDA for marketing in the United States.
After a PMA is filed, the FDA begins its review of the submitted
information, which generally takes between one and two years, but may take
significantly longer. During this review period, the FDA may request
additional information or clarification of information already provided. Also
during the review period, an advisory panel of experts from outside the FDA
will be convened to review and evaluate the application and provide
recommendations to the FDA as to the approvability of the device. In addition,
the FDA will conduct a preapproval inspection of the manufacturing facility to
ensure compliance with QS regulation requirements. There can be no assurance
that the Company will be able to meet the FDA's requirements or that any
necessary approval will be granted in a reasonable time frame, or at all.
New PMAs or PMA supplements are required for significant modifications to
the manufacture, labeling and design of a device that is approved through the
PMA process. Supplements to a PMA often require submission of the same type of
information as a PMA, except that the supplement is limited to information
needed to support any changes from the device covered by the original PMA and
may not require as extensive clinical data or the convening of an advisory
panel.
The PMA process can be expensive, uncertain and can frequently require
several years. Even when a PMA is approved, the FDA may impose restrictions on
the indications for which the device
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can be marketed. There can be no assurance that the Company will be able to
obtain necessary approvals on a timely basis, or at all, and delays in
obtaining or failure to obtain such approvals, the loss of previously obtained
approvals, or failure to comply with existing or future regulatory
requirements could have an adverse effect on the Company's business, financial
condition and results of operations.
Subsequent to the receipt of an FDA approval, the Company will continue to
be regulated by the FDA with regard to the reporting of adverse events related
to its products, and ongoing compliance with QS regulation. The Company's
manufacturing facility must be registered with the FDA and the CDHS and will
be subject to periodic inspections by the FDA and by the CDHS. A Device
Manufacturing License has been issued by the State of California and this
license must be renewed annually for the Company to continue manufacture of
medical devices in California.
Europe
The primary regulatory environment in Europe is that of the EU which
consists of 15 countries encompassing most of the major countries in Europe.
The EU has adopted numerous directives and standards regulating the design,
manufacture, clinical trial, labeling, and adverse event reporting for medical
devices. The principal directives prescribing the laws and regulations
pertaining to medical devices in the EU are the MDD and the AIMDD. In the EU,
the Company's soundbridges will be regulated as active implantables and
therefore be governed by the AIMDD. For products, such as those of the
Company, that have not previously been commercialized in the EU, CE marking is
required prior to initiation of sales in the EU. Certain other countries, such
as Switzerland, have voluntarily adopted laws and regulations that mirror
those of the EU with respect to medical devices.
Devices that comply with the requirements of a relevant directive will be
entitled to bear CE conformity marking, indicating that the device conforms
with the essential requirements of the applicable directive, and accordingly,
can be commercially distributed throughout the EU. The method of assessing
conformity varies depending on the class of the product, but normally involves
a combination of self-assessment by the manufacturer and a third-party
assessment by a Notified Body. This third party assessment may consist of an
audit of the manufacturer's quality system and specific testing of the
manufacturer's product. An assessment by a Notified Body in one country within
the EU is required in order for a manufacturer to commercially distribute the
product throughout the EU.
For purposes of determining the necessary steps for assessing conformity,
devices are classified under the Directives as Class I, Class IIa, Class IIb,
Class III, or Active Implantable Medical Devices. Devices having a higher
classification are considered to have a higher risk and, accordingly, are
subject to more controls in order to bear CE marking. The Vibrant soundbridge
is designated as an Active Implantable Medical Device. Essential requirements
under the AIMDD include substantiating that the device meets the
manufacturer's performance claims and that safety issues, if any, constitute
an acceptable risk when weighed against the intended benefits of the device.
The two principal aspects of assessing conformity for Active Implantable
Medical Devices are determinations from the Notified Body that the processes
employed in the design and manufacture of a device qualify as a full quality
system in compliance with applicable standards (e.g., EN ISO 9001, EN 46001
and 90/385/EEC), and that the technical, preclinical, and clinical data
gathered on the device are adequate to support CE marking.
The Company has undergone an inspection by its Notified Body and its quality
system has been certified by the Notified Body as being in compliance with the
required standards. The Company has submitted the technical, preclinical and
clinical data that its Notified Body has indicated will be required to satisfy
the essential requirements of the AIMDD. To satisfy these requirements, the
Company must complete a clinical trial conducted under European clinical trial
standards (EN 540)
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to determine the safety and performance of the products. The Company must
continue to pass annual EN ISO 9001, EN 46001 and AIMDD 2.3 quality system
audits in order to retain international approvals. As of February 6, 1998, a
total of 45 patients in the European clinical trial have been implanted with
the Company's soundbridges (19 with the Vibrant and 26 with the Vibrant P) of
whom 42 have had the Audio Processor fitted and the soundbridge's performance
evaluated. There can be no assurance that such data will be accepted by the
Company's Notified Body, or that the Notified Body will not require the
Company to obtain additional data from additional clinical trials involving
more patients in order to demonstrate the safety and performance of the
Vibrant and the Vibrant P soundbridges.
Once a manufacturer has satisfactorily completed the regulatory compliance
tasks required by the directives and received favorable determinations by the
Notified Body, it is eligible to place the CE mark on its products.
Manufacturers are subject to ongoing regulation under the AIMDD. The quality
system will be subject to periodic audit and recertification, and serious
adverse events must be reported to the authorities in the country where the
incident takes place. If such incidents occur, the manufacturer may have to
take remedial action, including withdrawal of the product from the EU market.
While no additional premarket approvals in individual EU countries are
required, prior to the marketing of a device bearing the CE mark, practical
complications with respect to market introduction may occur. For example,
differences among countries have arisen with regard to labeling requirements.
Also, as the directives do not cover reimbursement and distribution practices,
differences may occur in these and other areas.
THIRD-PARTY REIMBURSEMENT
The Company believes that its products will generally be purchased by
hospitals and clinics upon the recommendation of a surgeon. In the United
States, hospitals, physicians and other health care providers that purchase
medical devices generally rely on third-party payors, principally Medicare,
Medicaid, private health insurance plans, health maintenance organizations and
other sources of reimbursement for health care costs, to reimburse all or part
of the cost of the procedure in which the medical device is being used. Such
third-party payors have become increasingly sensitive to cost containment in
recent years and place a high degree of scrutiny on coverage and payment
decisions for new technologies and procedures.
Hearing aids, which are the subject of 510(k) and do not involve surgery,
are generally not reimbursed, although a modest reimbursement is provided
under certain insurance plans. Traditionally, hearing aid users have paid for
these devices directly. For cochlear implants, however, that are
technologically advanced and FDA-approved through the PMA process for the
treatment of profound hearing impairment, a reimbursement is available for the
device, the audiological testing, and the surgery. Similarly, reimbursement is
available for ossicular replacement prostheses that are FDA-approved for the
treatment of conductive hearing impairment. The Company anticipates that, as
surgically implanted devices that require FDA PMA approval, the Company's
products may also be the subject of reimbursement in the future. During
clinical trials, the Company does not anticipate that there will be any
reimbursement for the Vibrant soundbridge implant or procedure.
The Company's strategy is to pursue reimbursement for the Vibrant
soundbridge, once a PMA is approved by the FDA, based on surgeon endorsement
and demonstration of improved quality of life for specific patient groups.
Quality of life issues are included in the Company's clinical trial to provide
data in support of this reimbursement strategy. There can be no assurance that
the Company will be able to demonstrate improvement in quality of life or that
reimbursement will ever be available for the Company's products.
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Certain third-party payors are moving toward a managed care system in which
they contract to provide comprehensive health care for a fixed cost per
person. The fixed cost per person established by these third-party payors may
be independent of the hospital's cost incurred for the specific case and the
specific devices used. Medicare and other third-party payors are increasingly
scrutinizing whether to cover new products and the level of reimbursement for
covered products. Because the Company's hearing prostheses are currently under
development and have not received FDA clearance or approval, uncertainty
exists regarding the availability of third-party reimbursement for procedures
that would use the Company's soundbridges. Failure by physicians, hospitals
and other potential users of the Company's soundbridges to obtain sufficient
reimbursement from third-party payors for the procedures in which the
Company's soundbridges are intended to be used could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Third-party payors that do not use prospectively fixed payments increasingly
use other cost-containment processes or require various outcomes data that may
pose administrative hurdles to the use of the Company's soundbridges. In
addition, third-party payors may deny reimbursement if they determine that the
device used in a procedure is unnecessary, inappropriate, experimental, used
for a non-approved indication or is not cost-effective. Potential purchasers
must determine that the clinical benefits of the Company's products justify
the additional cost or the additional effort required to obtain prior
authorization or coverage and the uncertainty of actually obtaining such
authorization or coverage.
If the Company obtains the necessary foreign regulatory approvals, market
acceptance of the Company's products and products currently under development
in international markets would be dependent, in part, upon the availability of
reimbursement within prevailing health care payment systems. Reimbursement and
health care payment systems in international markets vary significantly by
country, and include both government sponsored health care and private
insurance. There can be no assurance that any international reimbursement
approvals will be obtained in a timely manner, if at all. Failure to receive
international reimbursement approvals could have a material adverse effect on
market acceptance of the Company's products in the international markets in
which such approvals are sought.
The Company believes that in the future reimbursement will be subject to
increased restrictions both in the United States and in international markets.
The Company believes that the overall escalating cost of medical products and
services will continue to lead to increased pressures on the health care
industry, both foreign and domestic, to reduce the cost of products and
services, including the Company's products and products currently under
development. There can be no assurance in either United States or
international markets that third-party reimbursement and coverage will be
available or adequate, that future legislation, regulation or reimbursement
policies of third-party payors will not otherwise adversely affect the demand
for the Company's products or products currently under development or its
ability to sell its products on a profitable basis. The unavailability of
third-party payor coverage or the inadequacy of reimbursement could have a
material adverse effect on the Company's business, financial condition and
results of operations.
PRODUCT LIABILITY
The Company's business involves the inherent risk of product liability
claims. The Company maintains limited product liability insurance at coverage
levels which the Company believes to be commercially reasonable and adequate
given the Company's current operations. However, there can be no assurance
that such insurance will continue to be available on commercially reasonable
terms, or at all, or that such insurance will be adequate to cover liabilities
that may arise. Any claims that are brought against the Company could, if
successful, have an adverse effect on the Company's business, financial
condition and results of operations.
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EMPLOYEES
At December 31, 1997, the Company had 45 employees. Of these employees, 23
were in research and development, including regulatory and clinical affairs,
16 were in manufacturing and quality assurance and six were in administration,
sales and marketing. None of the Company's employees is covered by a
collective bargaining agreement and the Company believes that it maintains
good relations with its employees.
FACILITIES
The Company's principal administrative, manufacturing and research and
development facility occupies approximately 11,500 square feet in San Jose,
California, pursuant to a lease that expires in August 1998. The Company has
signed a lease on a facility of approximately 30,500 square feet in San Jose,
California that expires in December 2002. The Company is in the process of
making leasehold improvements in this building and expects to occupy the
facility in the first quarter of 1998. This new facility, which will replace
the current facility, is necessary for the establishment of commercial-scale
manufacturing, and will house all of the Company's U.S. operations. The
Company has established an office in Basel, Switzerland for the headquarters
of its European sales and marketing organization.
LEGAL PROCEEDINGS
The Company is not currently engaged in any legal proceedings.
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SCIENTIFIC ADVISORY BOARD
The Company has established a Scientific Advisory Board consisting of
leading professionals in the fields of otology, otolaryngology and audiology.
Each member of the Board has received options for stock, pursuant to the 1994
Option Plan, for participation on the Board. The Board meets periodically and
reviews the Company's clinical progress and product development plans. In
addition, members of the Scientific Advisory Board are available on an
individual basis to consult with the Company. The members of the Scientific
Advisory Board are as follows:
BYRON J. BAILEY, MD. has been a member of the Company's Scientific Advisory
Board since March 1995. Dr. Bailey is an otolaryngologist. He is Chairman of
the Department of Otolaryngology at the University of Texas Medical Branch at
Galveston, Texas. Dr. Bailey has served on numerous committees with the
American Academy of Otolaryngology-Head and Neck Surgery as well as advisory
committees for the FDA. He is a past president of the American Academy of
Otolaryngology-Head and Neck Surgery.
CHARLES I. BERLIN, PH.D. has been a member of the Company's Scientific
Advisory Board since March 1995. Dr. Berlin is a clinical audiologist. He is
Director of the Kresge Hearing Research Laboratory of the South, part of
Louisiana State University Medical Center ("LSUMC") in New Orleans, Louisiana.
At LSUMC, Dr. Berlin is also a Professor in the Department of
Otorhinolaryngology and Biocommunication, in the Department of Physiology and
in the School of Allied Health's Department of Communication Disorders.
DERALD E. BRACKMANN, MD. has been a member of the Company's Scientific
Advisory Board since March 1995. Dr. Brackmann is an otologist and
neurotologist. He is President of the House Ear Clinic, and Chief of the
Otology Service at St. Vincent Medical Center in Los Angeles, California and
at the University of Southern California/Los Angeles County Medical Center.
Dr. Brackmann has published more than 200 papers and has three textbooks to
his credit. He is a past president of the American Academy of Otolaryngology-
Head and Neck Surgery, the American Otological Society and the North American
Skull Base Society.
RICHARD A. CHOLE, MD, PH.D. has been a member of the Company's Scientific
Advisory Board since April 1995. Dr. Chole is an otologist and neurotologist.
He is Chairman of the Department of Otolaryngology at the University of
California, Davis School of Medicine. Dr. Chole's research has been supported
by the National Institutes of Health, The Deafness Research Foundation, the
American Otologic Society and the University of California. He serves on the
Expert Panel on Hearing and Hearing Impairment for the National Institute of
Deafness and Communication Disorders.
CHARLES M. LUETJE, MD. has been a member of the Company's Scientific
Advisory Board since March 1995. Dr. Luetje is an otologist and neurotologist
in private practice. Additionally, Dr. Luetje serves as a Clinical Assistant
Professor in the Department of Surgery/Otolaryngology at the University of
Missouri Medical Center and as a preceptor and instructor in the Department of
Otolaryngology at the University of Kansas Medical Center. He has over 100
presentations and papers to his credit and serves as the President Elect of
the American Otological Society.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company, their
positions with the Company and ages as of December 31, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Harry S. Robbins............ 50 Chairman of the Board of Directors,
President and Chief Executive Officer
Geoffrey R. Ball............ 33 Vice President, Chief Technical Officer and
Director
R. Michael Crompton......... 39 Vice President of Regulatory and Clinical
Affairs and Quality Assurance
Peter Hertzmann............. 49 Vice President of Marketing
Bob H. Katz................. 37 Vice President of Research and Development
Alfred G. Merriweather...... 43 Vice President of Finance and Chief
Financial Officer
Patrick J. Rimroth.......... 42 Vice President of Operations
John de Mora-Mieszkowski.... 53 Director of European Sales and Marketing
B.J. Cassin(1)(2)........... 64 Director
Terry Gould................. 40 Director
Michael J. Levinthal(1)(2).. 43 Director
Petri T. Vainio(1)(2)....... 38 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
HARRY S. ROBBINS co-founded the Company and has served as Chairman of the
Board of Directors, President and Chief Executive Officer of the Company since
its founding in May 1994. From January 1991 to December 1993, Mr. Robbins was
President and Chief Executive Officer of CardioRhythm, Inc., a medical device
company that, from May 1992, was a subsidiary of Medtronic, Inc. Previously,
Mr. Robbins held executive sales and marketing positions with Laserscope and
Diasonics, Inc., medical device companies. Mr. Robbins is a director of
Business Resource Group, a distributor of office furniture and systems. Mr.
Robbins holds a B.A. degree in arts and sciences from Pennsylvania State
University.
GEOFFREY R. BALL invented the FMT, co-founded the Company and has served as
Vice President and Chief Technical Officer and a director since May 1994. From
1987 to March 1994, Mr. Ball was a biomedical engineer in the hearing research
laboratory at the Veterans Hospital in Palo Alto, California, affiliated with
Stanford University. Mr. Ball holds an M.S. degree in systems management from
the University of Southern California and a B.S. degree in human development
and performance from the University of Oregon.
R. MICHAEL CROMPTON has been Vice President of Regulatory Affairs and
Quality Assurance of the Company since June 1996 and Vice President of
Regulatory and Clinical Affairs and Quality Assurance since January 1998. From
June 1995 to May 1996, from October 1993 to January 1994 and from February
1992 to August 1992, Mr. Crompton was employed by Advanced Bioresearch
Associates, a medical device consulting company, where he specialized in
regulatory consultation for FDA-regulated products. From February 1994 to May
1995, Mr. Crompton was an attorney with Hyman, Phelps & McNamara, a
Washington, D.C. law firm specializing in FDA matters. From September 1992 to
September 1993, Mr. Crompton was Manager of Regulatory Affairs at Tosoh
Medics, Inc., a medical device company. Mr. Crompton has a J.D. degree from
the University of San Francisco, and a B.A. degree in biochemistry and an
M.P.H. degree in biomedical sciences from the University of California at
Berkeley.
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PETER HERTZMANN served as Vice President of Marketing and Clinical Affairs
of the Company from October 1994 until January 1998 and has since served as
Vice President of Marketing. From July 1990 to October 1994, Mr. Hertzmann was
the president of Peter Hertzmann, Inc., a marketing consulting firm to the
medical device and surgical community. Mr. Hertzmann holds a B.S. degree in
photographic science and instrumentation from the Rochester Institute of
Technology.
BOB H. KATZ has been Vice President of Research and Development of the
Company since October 1994. From April 1990 to October 1994, Mr. Katz was
employed by Telectronics Pacing Systems, a manufacturer of implantable medical
devices. At Telectronics Pacing Systems, he served as Program Manager,
Bradycardia Product Development, from 1990 to September 1993 and as Director
of Strategic Planning, Instrument Systems, from September 1993 to October
1994. Mr. Katz holds a B.A. degree in business administration and a B.S.
degree in electrical engineering from Rutgers University, an M.S. degree in
biomedical engineering from Boston University and an M.B.A. from Nova
Southeastern University.
ALFRED G. MERRIWEATHER has been Vice President of Finance and Chief
Financial Officer of the Company since March 1996. From September 1993 to
March 1996, Mr. Merriweather was Senior Vice President of Finance and
Administration and Chief Financial Officer of LipoMatrix Inc., a medical
device company. From 1983 to August 1993, Mr. Merriweather held executive
management positions with Laserscope, including serving as Vice President of
Finance and Chief Financial Officer from 1988. Mr. Merriweather holds a B.A.
degree in economics from the University of Cambridge, England.
PATRICK J. RIMROTH has served as Vice President of Operations of the Company
since March 1996 and as Vice President of Manufacturing, from November 1995 to
March 1996. From June 1994 to October 1995, Mr. Rimroth was Vice President of
Research and Development for Camino Neurocare, a medical device company. From
December 1988 to June 1994, Mr. Rimroth held multiple research and development
management positions with divisions of C.R. Bard, Inc., a medical device
company. Mr. Rimroth has a B.S. degree in biology and a B.S.E.E. degree in
electronic engineering from Purdue University.
JOHN DE MORA-MIESZKOWSKI has been Director of European Sales and Marketing
since September 1997. From September 1994 to August 1997, Mr. de Mora-
Mieszkowski was Marketing and Sales Manager, Europe, for Cochlear AG, a
distributor of cochlear implants. From March 1992 to September 1994, Mr. de
Mora-Mieszkowski was Divisional Sales Manager for Cilag International AG, a
pharmaceutical company. Mr. de Mora-Mieszkowski holds a B.S. degree in
biochemistry from the University of London, England.
B.J. CASSIN has served as a director of the Company since July 1994. Mr.
Cassin has been a private venture capital investor since 1979. Previously, he
co-founded Xidex Corporation, a manufacturer of data storage media, and served
as Vice President of Marketing. Mr. Cassin is a director of Advanced Fiber
Communications, Inc. and Cerus Corporation (of which he is Chairman). Mr.
Cassin holds an A.B. degree from Holy Cross College.
TERRY GOULD has served as a director of the Company since May 1996. Mr.
Gould has been a partner in the Private Markets Group of Brinson Partners,
Inc. since January 1994. From November 1989 to December 1993, Mr. Gould was
employed by Trinity Ventures Ltd., a venture capital firm. Mr. Gould holds a
B.A. degree in engineering science from Dartmouth College and an M.B.A. degree
from Stanford University.
MICHAEL J. LEVINTHAL has served as a director of the Company since July
1994. Mr. Levinthal has been a General Partner of several venture capital
funds affiliated with Mayfield Fund since 1984. He currently serves as a
director of InControl, Inc., Focal, Inc. and Heartstream, Inc., medical device
companies. Mr. Levinthal holds a B.S., an M.S. and an M.B.A. degree from
Stanford University.
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PETRI T. VAINIO has served as a director of the Company since July 1994. Dr.
Vainio is a general partner of Sierra Ventures, a venture capital firm he
joined in 1988. He currently serves as a director of Heartport, Inc., a
medical device company. Dr. Vainio holds M.D. and Ph.D. degrees from the
University of Helsinki, Finland, and an M.B.A. degree from Stanford
University.
BOARD COMPOSITION
The Company currently has authorized six directors. In accordance with the
terms of the Company's Restated Certificate of Incorporation, to be filed
after the closing of this offering, the terms of office of the Board of
Directors will be divided into three classes: Class I, whose term will expire
at the annual meeting of stockholders to be held in 1999; Class II, whose term
will expire at the annual meeting of stockholders to be held in 2000; and
Class III, whose term will expire at the annual meeting of stockholders to be
held in 2001. The Class I directors will be Terry Gould and Geoffrey R. Ball,
the Class II directors will be Petri T. Vainio and Michael J. Levinthal and
the Class III directors will be B.J. Cassin and Harry S. Robbins. At each
annual meeting of stockholders after the initial classification of the Board
of Directors, the successors to directors whose term will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following such election. In addition, the Company's Restated
Certificate of Incorporation provides that the authorized number of directors
may be changed only by resolution of the Board of Directors. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the directors. This classification of the Board
of Directors may have the effect of delaying or preventing changes in control
or management of the Company.
Each officer is elected by and serves at the discretion of the Board of
Directors. Each of the Company's officers, directors and key employees, other
than nonemployee directors, devote substantially full time to the affairs of
the Company. The Company's nonemployee directors devote such time to the
affairs of the Company as is necessary to discharge their duties. There are no
family relationships among any of the directors, officers or key employees of
the Company.
BOARD COMMITTEES
The Audit Committee of the Board of Directors reviews the internal
accounting procedures of the Company and consults with and reviews the
services provided by the Company's independent accountants. The members of the
Audit Committee are B.J. Cassin, Michael J. Levinthal and Petri T. Vainio. The
Compensation Committee of the Board of Directors reviews and recommends to the
Board the compensation and benefits of all officers of the Company and
establishes and reviews general policies relating to compensation and benefits
of employees of the Company. The members of the Compensation Committee are
B.J. Cassin, Michael J. Levinthal and Petri T. Vainio.
DIRECTOR COMPENSATION
The Company does not compensate the directors for the services they provide
as directors other than reasonable expenses in connection with attendance at
Board Meetings, for which directors may receive reimbursement. However, in the
past, stock options have been granted to individuals who serve as directors.
50
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the summary of the compensation paid by the
Company during the fiscal year ended December 31, 1997 to the Company's Chief
Executive Officer and each of the Company's other most highly compensated
executive officers (collectively the "Named Executive Officers"), whose total
annual salary and bonus for such fiscal year were in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- SECURITIES
NAME AND PRINCIPAL OTHER UNDERLYING
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS
- ------------------ ---- --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Harry S. Robbins.......... 1997 $224,327 $105,750 -- --
President and Chief
Executive Officer
R. Michael Crompton....... 1997 122,627 33,865 -- 29,069
Vice President of
Regulatory and Clinical
Affairs and Quality
Assurance
Bob H. Katz............... 1997 121,706 32,533 -- 43,603
Vice President of
Research and Development
Alfred G. Merriweather.... 1997 138,832 39,389 -- 14,534
Vice President of Finance
and Chief Financial
Officer
Patrick J. Rimroth........ 1997 120,665 33,347 -- 29,068
Vice President of
Operations
</TABLE>
51
<PAGE>
The following table sets forth each grant of stock options made during the
fiscal year ended December 31, 1997 to each of the Named Executive Officers:
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1997
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENTAGE OF VALUE AT ASSUMED
TOTAL OPTIONS ANNUAL RATE OF STOCK
GRANTED TO EXERCISE PRICE APPRECIATION
OPTIONS EMPLOYEES IN OR BASE FOR OPTION TERM(4)
GRANTED FISCAL YEAR PRICE EXPIRATION ---------------------
NAME (#)(1) (%)(2) ($/Sh)(3) DATE 5% ($) 10% ($)
- ---- ------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Harry S. Robbins........ -- -- -- -- -- --
R. Michael Crompton..... 29,069 7.4 2.20 10/6/2007 409,552 690,023
Bob H. Katz............. 14,534 3.7 1.10 6/20/2007 220,756 360,987
29,069 7.4 2.20 10/6/2007 409,552 690,023
Alfred G. Merriweather.. 14,534 3.7 2.20 10/6/2007 204,769 345,000
Patrick J. Rimroth...... 14,534 3.7 1.10 6/20/2007 220,756 360,987
14,534 3.7 2.20 10/6/2007 204,769 345,000
</TABLE>
- --------
(1) Each of the options listed above vests as follows: The options were
immediately exercisable, conditioned upon the optionee entering into a
restricted stock purchase agreement with the Company with respect to any
unvested shares. The options vest or are released from the repurchase
option at the rate of one forty-eighth ( 1/48) at the end of each full
month beginning on the grant date for each option.
(2) Based on an aggregate of 395,681 options granted by the Company in the
year ended December 31, 1997 to employees of and consultants to the
Company, including the Named Executive Officers.
(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board
of Directors.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of
the Company's securities that the actual stock price appreciation over the
option term will be at the assumed 5% or 10% levels or at any other
defined level. Unless the market price of the Common Stock appreciates
over the option term, no value will be realized from the option grants
made to the executive officers. The potential realizable value is
calculated by assuming that the initial public offering price of $12.00
per share appreciates at the indicated rate for the entire term of the
option and that the option is exercised at the exercise price and sold on
the last day of its term at the appreciated price.
52
<PAGE>
The following table sets forth the information with respect to stock option
exercises during the year ended December 31, 1997 by each of the Named
Executive Officers, and the number and value of securities underlying
unexercised options held by the Named Executive Officers at December 31, 1997:
AGGREGATE OPTION EXERCISES IN FISCAL YEAR ENDED DECEMBER 31, 1997 AND
OPTION VALUES AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES VALUE FISCAL YEAR-END (#)(1) FISCAL YEAR-END ($)(2)
ACQUIRED ON REALIZED ------------------------- -------------------------
NAME EXERCISE (#)(1) ($)(2) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- --------------- --------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Harry S. Robbins........ 250,600 2,806,720 --/-- --/--
R. Michael Crompton..... -- -- 94,475/-- 1,021,993/--
Bob H. Katz............. 14,534 158,421 --/-- --/--
29,069 284,876 --/-- --/--
Alfred G. Merriweather.. 14,534 142,433 --/-- --/--
Patrick J. Rimroth...... 14,534 158,421 --/-- --/--
14,534 142,433 --/-- --/--
</TABLE>
- --------
(1) Shares and options held by the above Named Executive Officers are subject
to vesting over a four year period.
(2) Based on the initial public offering price, minus the per share exercise
price, multiplied by the number of shares underlying the option.
OPTION VESTING AGREEMENTS
The Company has entered into an option vesting agreement with each of its
officers with whom it has entered into a stock option agreement, to provide
for accelerated vesting of all shares subject to such option (i) 12 months
after a change in control or (ii) in the event such officer is involuntarily
terminated within the 12 month period following a change in control. For
purposes of the option vesting agreement, "change in control" is defined as
(i) the closing of a merger, reorganization, sale of shares or sale of
substantially all of the assets of the Company in which the stockholders of
the Company immediately prior to the closing of the transaction own less than
50% of the voting power of the surviving or controlling entity (or its parent)
immediately after the transaction, or (ii) the date of the approval by the
stockholders of the Company of a plan of complete liquidation of the Company.
The following officers were granted the following options to purchase shares
of Common Stock through December 31, 1997, which options vest over four years:
R. Michael Crompton (109,009 shares); Peter Hertzmann (94,474 shares); Bob H.
Katz (188,950 shares); Alfred G. Merriweather (112,643 shares); Patrick J.
Rimroth (109,008 shares); and Harry S. Robbins (250,600 shares).
INCENTIVE STOCK PLANS
1994 Option Plan. The 1994 Option Plan was adopted by the Board of Directors
and approved by the stockholders in July 1994. As of December 31, 1997,
566,531 shares were subject to outstanding options at exercise prices ranging
from $0.14 to $8.81 per share and 403,159 shares were available for future
grant under the 1994 Option Plan. The purposes of the 1994 Option Plan are to
attract and retain qualified personnel, to provide additional incentives to
employees, officers and consultants of the Company and to promote the success
of the Company's business. Pursuant to the 1994 Option Plan, the Company may
grant options which qualify as incentive stock options under Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), to employees
(including officers and directors who are employees) and nonqualified stock
options to employees, officers, directors and consultants.
53
<PAGE>
The Compensation Committee is authorized to administer the 1994 Option Plan,
including the selection of the employees, directors and consultants of the
Company to whom stock options may be granted and the interpretation and
adoption of rules for the operation of the 1994 Option Plan. Options granted
under the 1994 Option Plan generally vest incrementally over a four-year
period. However, the vesting schedule is subject to modification by the Board
of Directors. The maximum term for options granted under the 1994 Option Plan
is ten years, except that, if at the time of the grant the optionee possesses
more than 10% of the combined voting power of the Company (a "10%
Stockholder"), the maximum term of an option is five years. The exercise price
of incentive stock options granted to a 10% stockholder must be at least 110%
of the fair market value of the stock subject to the option on the date of
grant. Except pursuant to a merger or other corporate transaction, the
exercise price of nonqualified stock options granted under the 1994 Option
Plan must be at least 100% of the fair market value of the stock subject to
the option on the date of grant. Payment of the exercise price may be made by
cash, check, promissory note, other shares of Common Stock of the Company
owned by the optionee for a sufficient period, cancellation of indebtedness
pursuant to a cashless exercise program, if one is implemented by the Company,
and any other method permitted by law. The 1994 Option Plan may be amended at
any time by the Board of Directors, although certain amendments would require
stockholder approval. The 1994 Option Plan will terminate in 2004, unless
earlier terminated by the Board of Directors.
Employee Stock Purchase Plan. The Company's Employee Stock Purchase Plan
(the "Purchase Plan") was adopted by the Company's Board of Directors in
November 1997 and approved by the stockholders in January 1998. The Purchase
Plan is intended to qualify under Section 423 of the Code. The Company has
reserved 75,000 shares of Common Stock for issuance under the Purchase Plan.
Under the Purchase Plan, an eligible employee may purchase shares of Common
Stock from the Company through payroll deductions of up to 10% of his or her
compensation, at a price per share equal to 85% of the lower of (i) the fair
market value of the Company's Common Stock on the first day of an offering
period under the Purchase Plan or (ii) the fair market value of the Common
Stock on the last day of a purchase period. Each offering period will last for
24 months and will commence the first day on which the national stock
exchanges and The Nasdaq Stock Market are open for trading on or after May 1
and November 1 of each year. The first offering period will begin upon the
effective date of this offering and will end on October 31, 1998. Any employee
who is customarily employed for at least 20 hours per week and more than five
months per calendar year is eligible to participate in the Purchase Plan. No
shares have been purchased under the Purchase Plan to date.
EMPLOYEE RETIREMENT PLANS
In April 1996, the Company implemented a Retirement Savings and Investment
Plan that is intended to qualify under Section 401(k) of the Code (the "401(k)
Plan") covering all of the Company's employees who have attained age 18. An
employee may elect to defer, in the form of contributions to the 401(k) Plan
on his or her behalf, up to 20% of the total compensation that would otherwise
be paid to the employee, not to exceed the amount allowed by applicable
Internal Revenue Service guidelines. The Company may in its discretion make
matching contributions to the 401(k) Plan, but has not yet done so.
Contributions by employees or by the Company to the 401(k) Plan, and income
earned on plan contributions, are not taxable to employees until withdrawn
from the 401(k) Plan. Contributions by the Company are deductible by the
Company when made.
54
<PAGE>
CERTAIN TRANSACTIONS
In July, August and October 1994 and January 1995, the Company issued and
sold 5,463,000 shares of Series A Preferred Stock at a purchase price of $1.00
per share to a total of 40 investors. The directors, officers and 5%
stockholders that purchased shares of Series A Preferred Stock and the number
of shares that each purchased are (i) B.J. Cassin and affiliates, 295,000
shares, (ii) Coral Partners IV, Limited Partnership, 1,000,000 shares, (iii)
Mayfield VII and affiliates, 1,500,000 shares, (iv) Peter Hertzmann, Inc.,
15,000 shares and (v) Sierra Ventures IV and affiliates, 1,750,000 shares.
Upon completion of this offering at an assumed initial public offering price
of $12.00 per share, all outstanding shares of Preferred Stock will convert
into shares of Common Stock at a 1.376-to-one ratio.
In June 1995, the Company issued and sold 1,378,500 shares of Series B
Preferred Stock at a purchase price of $4.00 per share to a total of 31
investors. The directors, officers and 5% stockholders that purchased shares
of Series B Preferred Stock and the number of shares that each purchased are
(i) B.J. Cassin and affiliates, 111,188 shares, (ii) Coral Partners IV,
Limited Partnership, 250,000 shares, (iii) Mayfield VII and affiliates,
375,000 shares, (iv) Peter Hertzmann, Inc., 3,750 shares and (v) Sierra
Ventures IV and affiliates, 437,500 shares.
In May and June 1996, the Company issued and sold 1,162,451 shares of Series
C Preferred Stock at a purchase price of $5.35 per share to a total of 20
investors pursuant to the terms of the Series C Preferred Stock Purchase
Agreement. The directors, officers and 5% stockholders that purchased or
beneficially held shares of Series C Preferred Stock and the number of shares
that each purchased or beneficially held are (i) B.J. Cassin, 18,690 shares,
(ii) Brinson Venture Capital Fund III, L.P. and affiliates, 373,832 shares,
(iii) Coral Partners IV, Limited Partnership, 170,841 shares, (iv) Mayfield
VII and affiliates, 256,262 shares, (v) Peter Hertzmann, Inc., 2,804 shares
and (vi) Sierra Ventures IV and affiliates, 299,065 shares.
In November and December 1996 and June 1997, the Company issued and sold
1,190,680 shares of Series D Preferred Stock at a purchase price of $8.00 per
share to a total of 14 investors. The 5% stockholders that purchased or
beneficially held shares of Series D Preferred Stock and the number of shares
that each purchased or beneficially held are (i) B.J. Cassin, 23,125 shares,
(ii) Coral Partners IV, Limited Partnership, 92,706 shares, (iii) Mayfield VII
and affiliates, 139,036 shares, (iv) Sierra Ventures and affiliates, 162,238
shares and (v) JJDC, 750,000 shares.
In connection with the Company's Series D Preferred Stock issuances, the
Company granted one of the investors, JJDC, first negotiation rights, whereby
the Company agreed that it will not (i) transfer, dispose of, sell, lease or
license (exclusively or nonexclusively) to any third party, any of certain
defined intellectual property rights that are or may be used or may have
application in the field of implantable and semi-implantable hearing aid
devices or (ii) transfer or dispose of all or substantially all of the assets
or voting securities of the Company to any third party until it provides JJDC
the opportunity to consummate a similar transaction. JJDC's first negotiation
rights survive for a period of 18 months from the date of the June 1997 Series
D Preferred Stock financing or 12 months from the effective date of the
Company's registration statement relating to its initial public offering,
whichever first occurs. Notwithstanding the foregoing, JJDC's first
negotiation rights terminate in the event that JJDC, either directly or
through an affiliate, does not participate as an investor in this offering.
On March 14, 1997, the Company entered into an assignment agreement with
VibRx, Inc., a Delaware corporation ("VibRx"), whereby the Company assigned to
VibRx all of the right, title and interest of the Company in and to any and
all existing inventions, original works of authorship, developments,
improvements, trade secrets, patents and patent applications relating to (i)
an apparatus and method for sonically enhanced drug delivery and (ii) an
apparatus and method for
55
<PAGE>
sonically enhanced drug delivery with micro electromechanical machining. Harry
S. Robbins, the Company's President, is the President, sole director and sole
stockholder of VibRx. Independent and disinterested members of the Company's
Board of Directors negotiated the terms of such transfer with Mr. Robbins, who
negotiated on behalf of VibRx. Such terms provide that immediately prior to
the closing of an initial financing in which VibRx receives at least $500,000,
VibRx will issue to Symphonix that number of shares of common stock equal to
20% of the then outstanding capital stock of VibRx (including reserved
shares).
The Company has granted certain officers options to purchase shares of the
Company's Common Stock, which options were early exercised and paid for by
delivery of promissory notes to the Company by the following officers in the
following aggregate amounts (including accrued interest): Bob H. Katz
($92,882), Alfred G. Merriweather ($94,473), Patrick J. Rimroth ($99,764) and
Harry S. Robbins ($226,852). The notes have terms of five years and accrue
interest at an annual rate of approximately 6.5%.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to the Company with respect
to the beneficial ownership of its Common Stock as of December 31, 1997, and
as adjusted to reflect the sale of Common Stock offered by the Company hereby
for (i) each person who is known by the Company to own beneficially more than
5% of the Common Stock, (ii) each of the Company's directors, (iii) each Named
Executive Officer and (iv) all directors and executive officers of the Company
as a group.
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY
OWNED
SHARES -----------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
- ------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Entities Affiliated with Sierra Ventures(2)................. 1,954,294 20.6% 16.6%
3000 Sand Hill Road
Building 4, Suite 210
Menlo Park, CA 94025
Entities Affiliated with Mayfield(3)........................ 1,682,638 17.8% 14.3%
2800 Sand Hill Road, 2nd Floor
Menlo Park, CA 94025
Harry S. Robbins(4)......................................... 1,326,181 14.0% 11.3%
Symphonix Devices, Inc.
3047 Orchard Parkway
San Jose, CA 95134
Coral Partners IV, Limited Partnership...................... 1,099,960 11.6% 9.4%
60 South Sixth Street, Suite 3510
Minneapolis, MN 55402
Geoffrey R. Ball............................................ 672,238 7.1% 5.7%
Symphonix Devices, Inc.
3047 Orchard Parkway
San Jose, CA 95134
Petri T. Vainio(2).......................................... 1,954,294 20.6% 16.6%
Michael J. Levinthal(3)..................................... 1,682,638 17.8% 14.3%
Johnson & Johnson Development Corporation................... 545,058 5.8% 4.6%
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
B.J. Cassin(5).............................................. 354,875 3.7% 3.0%
Terry Gould(6).............................................. 286,486 3.0% 2.4%
Bob H. Katz................................................. 162,788 1.7% 1.4%
Alfred G. Merriweather(7)................................... 112,643 1.2% *
Patrick J. Rimroth(8)....................................... 109,009 1.2% *
R. Michael Crompton(9)...................................... 109,008 1.2% *
All directors and executive officers as a group (11 persons)
(2)(3)(4)(5)(6)(7)(8)(9)................................... 6,880,297 71.5% 57.7%
</TABLE>
- --------
* Represents beneficial ownership of less than one percent.
(1) Except as otherwise noted in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock.
57
<PAGE>
(2) Consists of 1,850,887 shares held by Sierra Ventures IV, 74,111 shares
held by Sierra Ventures IV International and an option to purchase up to
29,296 shares exercisable within 60 days after December 31, 1997 held by
Petri T. Vainio. Dr. Vainio, a director of the Company, is a General
Partner of the Sierra entities and disclaims beneficial ownership of the
shares held by such entities except to the extent of his proportionate
partnership interest therein.
(3) Consists of 1,567,441 shares held by Mayfield VII, 82,494 shares held by
Mayfield Associates Fund II and 32,703 shares held by Mayfield VII
Management Partners. Mr. Levinthal is a General Partner of Mayfield VII
Management Partners, which is General Partner of Mayfield VII and Mayfield
Associates Fund II, and disclaims beneficial ownership of the shares held
by such entities except to the extent of his proportionate partnership
interest.
(4) All such shares are held in the name of the Robbins Family Trust. Mr.
Robbins holds voting and dispositive power over all such shares.
(5) Consists of (i) 230,195 shares held in the name of the Cassin Family
Trust, over which Mr. Cassin holds voting and dispositive power, (ii)
95,384 shares held by Cassin Family Partners, a California Limited
Partnership, over which Mr. Cassin holds voting and dispositive power and
(iii) an option to purchase up to 29,296 shares exercisable within 60 days
after December 31, 1997.
(6) Consists of 246,316 shares held by Brinson Venture Capital Fund III, L.P.
("Brinson L.P.") and 40,170 shares held by Brinson Trust Company as
Trustee of the Brinson MAP Venture Capital Fund III ("Brinson MAP"). Mr.
Gould, a director of the Company, is a partner in the Private Markets
Group of Brinson Partners, Inc. Brinson Partners, Inc. is the General
Partner of Brinson L.P. and the manager of Brinson MAP. Mr. Gould
disclaims beneficial ownership of the shares held by such entities.
(7) All such shares are held in the name of the Merriweather Family Trust. Mr.
Merriweather holds voting and dispositive power over all such shares.
(8) All such shares are held in the name of the Rimroth Family Trust. Mr.
Rimroth holds voting and dispositive power over all such shares.
(9) Includes options to purchase up to 94,475 shares exercisable within 60
days after December 31, 1997.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company will consist of 50,000,000
shares of Common Stock and 5,000,000 shares of Preferred Stock after giving
effect to the conversion of all outstanding shares of Preferred Stock into
Common Stock and the restatement of the Company's Certificate of Incorporation
after the closing of this offering.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of the Company's Restated
Certificate of Incorporation which is included as an exhibit to the
Registration Statement of which this Prospectus is a part, and by the
provisions of applicable law.
COMMON STOCK
As of December 31, 1997, there were 9,466,742 shares of Common Stock
outstanding which were held of record by 101 stockholders, on a pro forma
basis to reflect the conversion of all outstanding shares of Preferred Stock
which will occur upon the closing of this offering.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding Preferred Stock, the holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available for
that purpose. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of Preferred Stock, if any,
then outstanding. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are
fully paid and non-assessable, and the shares of Common Stock to be issued
upon the closing of this offering will be fully paid and non-assessable.
PREFERRED STOCK
After the closing of this offering, the Company will be authorized to issue
5,000,000 shares of undesignated Preferred Stock, none of which will be
outstanding. The Board of Directors will have the authority, without further
action by the stockholders, to issue the undesignated Preferred Stock in one
or more series, to fix the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued shares of undesignated
Preferred Stock and to fix the number of shares constituting any series and
the designation of such series.
The issuance of Preferred Stock may have the effect of delaying, deferring
or preventing a change in control of the Company without further action by the
stockholders, may discourage bids for the Company's Common Stock at a premium
over the market price of the Common Stock and may adversely affect the market
price of and the voting and other rights of the holders of Common Stock. At
present, the Company has no plans to issue any of the Preferred Stock.
WARRANTS
As of December 31, 1997, the Company had outstanding a warrant to purchase
26,889 shares of Common Stock at $1.38 per share expiring in October 2004 and
two warrants to purchase an aggregate of 6,722 shares of Common Stock at $5.50
per share expiring in October 2004. The shares underlying these warrants are
entitled to registration rights. See "--Registration Rights of Certain
Holders."
59
<PAGE>
REGISTRATION RIGHTS OF CERTAIN HOLDERS
The holders of 6,682,078 shares of Common Stock and warrants to purchase
33,611 shares of Common Stock (the "Registrable Securities") or their
transferees are entitled to certain rights with respect to the registration of
such shares under the Securities Act. These rights are provided under the
terms of an agreement between the Company and the holders of Registrable
Securities. Subject to certain limitations in the agreement, the holders of at
least a majority of the Registrable Securities may require, on two occasions
beginning three months after the date of this Prospectus, that the Company use
its best efforts to register the Registrable Securities for public resale. If
the Company registers any of its Common Stock either for its own account or
for the account of other security holders, the holders of Registrable
Securities are entitled to include their shares of Common Stock in the
registration, subject to the ability of the underwriters to limit the number
of shares included in the offering. The holders of at least 20% of the
Registrable Securities may also require the Company to register all or a
portion of their Registrable Securities on Form S-3 when use of such form
becomes available to the Company, provided, among other limitations, that the
proposed aggregate selling price (net of any underwriters' discounts or
commissions) is at least $1.0 million. All registration expenses must be borne
by the Company and all selling expenses relating to Registrable Securities
must be borne by the holders of the securities being registered.
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BYLAWS
Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws to be effective upon completion of this offering may have the
effect of preventing, discouraging or delaying a change in the control of the
Company and may maintain the incumbency of the Board of Directors and
management. The authorization of undesignated Preferred Stock makes it
possible for the Board of Directors to issue Preferred Stock with voting or
other rights or preferences that could impede the success of any attempt to
change control of the Company. In addition, the Company's Bylaws limit the
ability of stockholders of the Company to raise matters at a meeting of
stockholders without giving advance notice.
The Restated Certificate of Incorporation provides that stockholder action
can be taken only at an annual or special meeting of stockholders and cannot
be taken by written consent in lieu of a meeting. The Restated Certificate of
Incorporation and the Bylaws provide that, except as otherwise required by
law, special meetings of the stockholders can only be called pursuant to a
resolution adopted by a majority of the Board of Directors, by the Chairman of
the Board or by the President of the Company.
The Bylaws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders of the Company,
including proposed nominations of persons for election to the Board.
Stockholders at an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting by or at the
direction of the Board or by a stockholder who was a stockholder of record on
the record date for the meeting, who is entitled to vote at the meeting and
who has given to the Company's Secretary timely written notice, in proper
form, of the stockholder's intention to bring that business before the
meeting. Although the Bylaws do not give the Board the power to approve or
disapprove stockholder nominations of candidates or proposals regarding other
business to be conducted at a special or annual meeting, the Bylaws may have
the effect of precluding the conduct of certain business at a meeting if the
proper procedures are not followed or may discourage or defer a potential
acquiror from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of the Company.
60
<PAGE>
CERTAIN PROVISIONS OF DELAWARE LAW
Following the consummation of the offering, the Company will be subject to
the "Business Combination" provisions of the Delaware General Corporation Law.
In general, such provisions prohibit a publicly held Delaware corporation form
engaging in various "business combination" transactions with any "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an "interested stockholder," unless (i) the
transaction is approved by the Board of Directors prior to the date the
interested stockholder obtained such status, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an "interested
stockholder," the "interested stockholder" owned at least 85% of the voting
stock of the corporation outstanding excluding those shares owned by (a)
persons who are directors and also officers and (b) employee stock plans in
which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer, or (iii) on or subsequent to such date the "business
combination" is approved by the board of directors and authorized at an annual
or special meeting of stockholders by the affirmative vote of at least 66 2/3%
of the outstanding voting stock which is not owned by the "interested
stockholder." A "business combination" is defined to include mergers, asset
sales and other transactions resulting in a financial benefit to a
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years, did own) 15% or
more of a corporation's voting stock. The statute could prohibit or delay
mergers or other takeover or change in control attempts with respect to the
Company and, accordingly, may discourage attempts to acquire the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is BankBoston, N.A.
61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could materially and adversely affect market prices prevailing from
time to time. Sales of substantial amounts of Common Stock of the Company in
the public market after the restrictions lapse could materially and adversely
affect the prevailing market price and the ability of the Company to raise
equity capital in the future.
Upon the completion of this offering, the Company will have 11,766,742
shares of Common Stock outstanding, assuming no exercise of options after
December 31, 1997. Of these shares, all of the 2,300,000 shares sold in this
offering will be freely tradeable without restriction under the Securities
Act, unless held by "affiliates" of the Company, as that term is defined in
Rule 144 under the Securities Act. The remaining 9,466,742 shares of Common
Stock held by existing stockholders were issued and sold by the Company in
reliance on exemptions from the registration requirements of the Securities
Act. These shares may be sold in the public market only if registered, or
pursuant to an exemption from registration such as Rule 144, 144(k) or 701
under the Securities Act. Such restricted shares will be available for sale in
the public market as follows: (i) no shares will be eligible for immediate
sale on the date of this Prospectus and (ii) approximately 9,778,357
additional shares (including approximately 311,615 shares subject to
outstanding vested options and outstanding warrants) will be available for
sale 180 days after the date of this Prospectus upon expiration of the Lock-up
Agreements, subject to certain volume and other limitations under Rule 144.
The Company and its directors, executive officers and all of its stockholders
have entered into the Lock-up Agreements, under which they have agreed not to
offer, sell, contract to sell, grant any option to purchase or otherwise
dispose of, or agree to dispose of, directly or indirectly, any shares of
Common Stock or options, rights or warrants to acquire shares of Common Stock,
or securities exchangeable for or convertible into shares of Common Stock,
owned by them for a period of 180 days following the day on which the
Registration Statement becomes effective (the "Effective Date"), without the
prior written consent of Cowen & Company or the Company, as the case may be,
except that, without such consent, the Company may issue Common Stock and
grant options pursuant to the 1994 Option Plan and issue Common Stock pursuant
to the exercise of outstanding warrants, and the current stockholders of the
Company who are not executive officers or directors of the Company may sell
Common Stock acquired in the offering or in the open market. The Company has
agreed not to release any stockholders from the terms of the Lock-up
Agreements with the Company. Cowen & Company may, in its sole discretion and
at any time without notice, release all or a portion of the shares subject to
Lock-up Agreements.
As of December 31, 1997, 566,531 shares were subject to outstanding options.
All of these shares are subject to the Lock-up Agreements. In addition,
6,715,689 of the shares outstanding immediately following the completion of
this offering (including up to 33,611 shares of Common Stock subject to
outstanding warrants) will be entitled to registration rights with respect to
such shares upon the release of the Lock-up Agreements. The number of shares
sold in the public market could increase if such rights are exercised.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least
one year (including the holding period of any prior owner, except an
affiliate) is entitled to sell in "broker's transactions" or to market makers,
within any three-month period commencing 90 days after the date of this
Prospectus, a number of shares that does not exceed the greater of (i) one
percent of the number of shares of Common Stock then outstanding
(approximately 118,000 shares immediately after this offering) or (ii) the
average weekly trading volume of the Common Stock during the four calendar
weeks preceding the required filing of a Form 144 with respect to such sale.
Sales under Rule 144 are generally subject to certain manner of sale
provisions and notice requirements and to the availability of current public
62
<PAGE>
information about the Company. Under Rule 144(k), a person who is not deemed
to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years (including the holding period of any prior owner,
except an affiliate), is entitled to sell such shares without having to comply
with the manner of sale, public information, volume limitation or notice
provisions of Rule 144. Under Rule 701 promulgated under the Securities Act,
persons who purchase shares upon exercise of options granted prior to the
effective date of this offering are entitled to sell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with the holding period requirements of Rule 144 and, in the case of
non-affiliates, without having to comply with the public information, volume
limitation or notice provisions of Rule 144.
63
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Underwriters named below (the "Underwriters"), through their
representatives, Cowen & Company and UBS Securities LLC (the
"Representatives"), have severally agreed to purchase from the Company the
following respective number of shares at the initial public offering price
less the underwriting discounts and commissions set forth on the cover page of
this Prospectus:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Cowen & Company.................................................. 730,000
UBS Securities LLC............................................... 730,000
BancAmerica Robertson Stephens................................... 50,000
BT Alex.Brown Incorporated....................................... 50,000
CIBC Oppenheimer Corp............................................ 50,000
Hambrecht & Quist LLC............................................ 50,000
Lehman Brothers Inc.............................................. 50,000
Morgan Stanley & Co. Incorporated................................ 50,000
NationsBanc Montgomery Securities LLC............................ 50,000
PaineWebber Incorporated......................................... 50,000
Prudential Securities Incorporated............................... 50,000
SBC Warburg Dillon Read Inc...................................... 50,000
Robert W. Baird & Co. Incorporated............................... 20,000
Branch, Cabell & Company......................................... 20,000
Dain Rauscher Incorporated....................................... 20,000
Fox-Pitt, Kelton Inc............................................. 20,000
Janney Montgomery Scott Inc...................................... 20,000
McDonald & Company Securities, Inc............................... 20,000
Nesbitt Burns Securities Inc..................................... 20,000
Parker/Hunter Incorporated....................................... 20,000
Pennsylvania Merchant Group Ltd.................................. 20,000
Piper Jaffray Inc................................................ 20,000
Raymond James & Associates, Inc.................................. 20,000
The Robinson-Humphrey Company, LLC............................... 20,000
Rodman & Renshaw, Inc............................................ 20,000
Scott & Stringfellow, Inc........................................ 20,000
Vector Securities International, Inc............................. 20,000
Wedbush Morgan Securities Inc.................................... 20,000
Wessels, Arnold & Henderson...................................... 20,000
---------
Total.......................................................... 2,300,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligations is such that
they are committed to purchase all shares of Common Stock offered hereby if
any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $0.48 per share. The Underwriters may allow and such dealers may re-
allow a concession not in excess of $0.10 per share to certain other dealers.
The
64
<PAGE>
Underwriters have informed the Company that they do not intend to confirm
sales to any accounts over which they exercise discretionary authority. After
the initial public offering of the shares, the offering price and other
selling terms may from time to time be varied by the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the Effective Date, to purchase up to 345,000 additional
shares of Common Stock at the initial public offering price, less the
underwriting discounts and commissions, set forth on the cover page of this
Prospectus, to cover over-allotments, if any. If the Underwriters exercise
such over-allotment option, the Underwriters have severally agreed, subject to
certain conditions, to purchase approximately the same percentage thereof that
the number of shares of Common Stock to be purchased by each of them shown in
the foregoing table bears to the total number of shares of Common Stock
offered hereby. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of shares of Common Stock offered
hereby.
The Company and its directors, executive officers and all of its
stockholders (holding in the aggregate approximately 9,466,742 shares of
Common Stock) have agreed with the Company or Cowen & Company that they will
not, without the prior written consent of the Company or Cowen & Company, as
the case may be, offer, sell, contract to sell, grant any option to purchase
or otherwise dispose of or otherwise agree to dispose of, directly or
indirectly any shares of Common Stock, options, rights or warrants to acquire
shares of Common Stock, or securities exchangeable for or convertible into
shares of Common Stock, owned by them for a period of 180 days following the
day on which the Registration Statement becomes effective, except that,
without such consent, the Company may issue Common Stock and grant options
pursuant to the 1994 Option Plan and issue Common Stock pursuant to the
exercise of outstanding warrants, and the current stockholders of the Company
who are not executive officers or directors of the Company may sell Common
Stock acquired in the offering or in the open market. The Company has agreed
not to release any stockholders from the terms of Lock-up Agreements with the
Company. See "Shares Eligible for Future Sale." In addition, the Company has
agreed that it will not, without the prior written consent of Cowen & Company,
offer, sell or otherwise dispose of any shares of Common Stock options, rights
or warrants to acquire shares of Common Stock, or securities exchangeable for
or convertible into shares of Common Stock during such 180-day period except
in certain limited circumstances.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock has been
determined by negotiation among the Company and the Representatives. Among the
factors considered in determining the initial public offering price were
prevailing market and economic conditions, market valuations of other
companies engaged in activities similar to the Company, estimates of the
business potential and prospects of the Company, the present state of the
Company's business operations, the Company's management and other factors
deemed relevant.
The Representatives have advised the Company that certain persons
participating in this offering may engage in transactions, including
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids which may have the effect of stabilizing or maintaining the market price
of the Common Stock at a level above that which might otherwise prevail in the
open market. A "stabilizing bid" is a bid for or the purchase of the Common
Stock on behalf of the Underwriters for the purpose of fixing or maintaining
the price of the Common Stock. A "syndicate covering transaction" is the bid
or the purchase of the Common Stock on behalf of the Underwriters to reduce a
short position incurred by the Underwriters in connection with this offering.
A "penalty bid" is an arrangement permitting the Representatives to reclaim
the selling concession otherwise accruing to
65
<PAGE>
an Underwriter or syndicate member in connection with the offering if the
Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Cooley Godward, LLP, Palo Alto, California is acting as
counsel for the Underwriters in connection with certain legal matters relating
to the shares of Common Stock offered hereby. As of December 31, 1997, a
certain investment partnership of Wilson Sonsini Goodrich & Rosati,
Professional Corporation beneficially owned an aggregate of 18,168 shares of
the Company's Common Stock.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1996
and 1997 and for each of the three years in the period ended December 31, 1997
and the period from May 17, 1994 (date of inception) to December 31, 1994 and
for the cumulative period from May 17, 1994 to December 31, 1997, included in
this Prospectus, have been included herein in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), in Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus, which is part of the Registration Statement, does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and Common Stock offered hereby, reference is made to the Registration
Statement and such exhibits and schedules filed therewith, which may be
inspected without charge at, or copies of such material may be obtained at
prescribed rates from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Registration Statement and such exhibits and schedules are also available on
the Commissions's Web site (http://www.sec.gov). Statements contained in this
Prospectus as to the contents of any contract or other document referred to
are not necessarily complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
66
<PAGE>
SYMPHONIX DEVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-7
Notes to Consolidated Financial Statements................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Symphonix Devices, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Symphonix
Devices, Inc. and Subsidiary (a company in the development stage) as of
December 31, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for the period from May 17,
1994 (date of inception) to December 31, 1994, for each of the three years in
the period ended December 31, 1997, and for the cumulative period from May 17,
1994 (date of inception) to December 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Symphonix
Devices, Inc. and Subsidiary (a company in the development stage) as of
December 31, 1996 and 1997, and the results of its operations and its cash
flows for the period from May 17, 1994 (date of inception) to December 31,
1994, for each of the three years in the period ended December 31, 1997, and
for the cumulative period from May 17, 1994 (date of inception) to December
31, 1997, in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
San Jose, California
January 9, 1998
F-2
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31,
-------------------------- 1997
1996 1997 (SEE NOTE 11)
------------ ------------ -------------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......... $ 6,539,156 $ 4,908,097
Short-term investments............. 4,570,723 6,548,952
Prepaid expenses and other current
assets............................ 76,694 451,109
------------ ------------
Total current assets............. 11,186,573 11,908,158
Property and equipment, net.......... 757,111 1,156,773
Other assets......................... 7,720 76,155
------------ ------------
Total assets..................... $ 11,951,404 $ 13,141,086
============ ============
LIABILITIES
-----------
Current liabilities:
Accounts payable................... $ 42,487 $ 366,390
Accrued compensation............... 675,429 887,976
Other accrued liabilities.......... 115,002 776,517
Current portion of capital lease
obligation........................ 284,644 322,562
------------ ------------
Total current liabilities........ 1,117,562 2,353,445
Capital lease obligation, less
current portion..................... 595,572 325,056
Bank borrowings...................... -- 2,000,000
------------ ------------
Total liabilities................ 1,713,134 4,678,501
------------ ------------
Commitments (Note 7)
STOCKHOLDERS' EQUITY
--------------------
Convertible preferred stock, $.001
par value:
Authorized: 9,750,000 shares ......
Issued and outstanding: 8,444,631
shares in 1996, 9,194,631 shares
in 1997, no shares pro forma
(Liquidation value: $26,721,553 at
December 31, 1997)................ 8,445 9,195
Common stock, $.001 par value:
Authorized: 20,000,000 shares .....
Issued and outstanding: 2,384,329
shares in 1996, 2,784,664 shares
in 1997 and 9,466,742 shares pro
forma............................. 2,384 2,785 $ 9,467
Notes receivable from stockholders... (139,200) (499,199) (499,199)
Deferred compensation................ -- (2,073,131) (2,073,131)
Unrealized losses on short-term
investments......................... -- (1,218) (1,218)
Additional paid-in capital........... 20,879,232 29,526,180 29,528,693
Cumulative translation adjustments... -- 1,616 1,616
Deficit accumulated during the
development stage................... (10,512,591) (18,503,643) (18,503,643)
------------ ------------ ------------
Total stockholders' equity....... 10,238,270 8,462,585 $ 8,462,585
------------ ------------ ============
Total liabilities and
stockholders' equity.......... $ 11,951,404 $ 13,141,086
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SYMPHONIX DEVICES INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM PERIOD FROM
MAY 17, 1994 MAY 17, 1994
(DATE OF (DATE OF
INCEPTION) INCEPTION)
TO YEAR ENDED DECEMBER 31, TO
DECEMBER 31, ------------------------------------- DECEMBER 31,
1994 1995 1996 1997 1997
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Costs and expenses:
Research and
development.......... $ 706,607 $ 3,306,994 $ 5,399,056 $ 6,400,968 $ 15,813,625
General and
administrative....... 140,961 624,685 1,047,076 2,064,450 3,877,172
--------- ----------- ----------- ----------- ------------
Operating loss...... (847,568) (3,931,679) (6,446,132) (8,465,418) (19,690,797)
Interest income......... 95,344 340,818 423,689 580,569 1,440,420
Interest expense........ (60,950) (86,113) (106,203) (253,266)
--------- ----------- ----------- ----------- ------------
Net loss............ $(752,224) $(3,651,811) $(6,108,556) $(7,991,052) $(18,503,643)
========= =========== =========== =========== ============
Net loss per common
share and per common
share-assuming
dilution............... $ (0.42) $ (1.86) $ (2.79) $ (3.10) $ (8.47)
========= =========== =========== =========== ============
Shares used in computing
net loss per common
share and per common
share-assuming
dilution............... 1,770,726 1,961,551 2,190,040 2,579,177 2,184,309
========= =========== =========== =========== ============
Pro forma net loss per
common share and per
common share-assuming
dilution............... $ (0.92)
===========
Shares used in computing
pro forma net loss per
common share and per
common share-assuming
dilution............... 8,713,953
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SYMPHONIX DEVICES INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM MAY 17, 1994
(DATE OF INCEPTION) TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
DEFICIT
NOTES UNREALIZED ACCUMULATED
PREFERRED STOCK COMMON STOCK RECEIVABLE GAINS (LOSSES) ADDITIONAL DURING THE
---------------- ---------------- FROM DEFERRED ON SHORT-TERM PAID-IN DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS COMPENSATION INVESTMENTS CAPITAL STAGE
--------- ------ --------- ------ ------------ ------------ -------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock
issued in June
1994 to founder
at $.03 per
share in
exchange for
promissory note. 1,075,581 $1,076 $(29,600) $28,524
Common stock
issued in June
1994 to founder
at $.03 per
share in
exchange for
services and
cash............ 679,501 679 18,021
Common stock
issued in
December 1994 in
connection with
stock option
exercises....... 145,348 145 19,855
Partial
repayment on
promissory note
from
stockholder..... 14,800
Series A
preferred stock
issued in July
1994 to
investors at
$1.00 per share,
net of issuance
costs of
$27,089......... 5,270,000 $5,270 5,237,641
Series A
preferred stock
issued in July
1994 at $1.00
per share in
exchange for
services........ 24,000 24 23,976
Net loss........ $ (752,224)
--------- ------ --------- ------ -------- --- --- ---------- ----------
Balances,
December 31,
1994............. 5,294,000 5,294 1,900,430 1,900 (14,800) 5,328,017 (752,224)
Series A
preferred stock
issued in
January 1995 at
$1.00 per share
in exchange for
services........ 30,000 30 29,970
Series A
preferred stock
issued in
January 1995 to
investors at
$1.00 per share,
net of issuance
costs of $470... 139,000 139 138,391
Series B
preferred stock
issued in June
1995 to
investors at
$4.00 per share,
net of issuance
costs of
$16,622......... 1,378,500 1,379 5,495,999
Common stock
issued in
January and
December 1995 in
connection with
stock option
exercises....... 79,712 80 10,888
Net loss........ (3,651,811)
--------- ------ --------- ------ -------- --- --- ---------- ----------
Balances,
December 31,
1995............. 6,841,500 6,842 1,980,142 1,980 (14,800) 11,003,265 (4,404,035)
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Common stock
issued in June
1994 to founder
at $.03 per
share in
exchange for
promissory note. $ --
Common stock
issued in June
1994 to founder
at $.03 per
share in
exchange for
services and
cash............ 18,700
Common stock
issued in
December 1994 in
connection with
stock option
exercises....... 20,000
Partial
repayment on
promissory note
from
stockholder..... 14,800
Series A
preferred stock
issued in July
1994 to
investors at
$1.00 per share,
net of issuance
costs of
$27,089......... 5,242,911
Series A
preferred stock
issued in July
1994 at $1.00
per share in
exchange for
services........ 24,000
Net loss........ (752,224)
-------------
Balances,
December 31,
1994............. 4,568,187
Series A
preferred stock
issued in
January 1995 at
$1.00 per share
in exchange for
services........ 30,000
Series A
preferred stock
issued in
January 1995 to
investors at
$1.00 per share,
net of issuance
costs of $470... 138,530
Series B
preferred stock
issued in June
1995 to
investors at
$4.00 per share,
net of issuance
costs of
$16,622......... 5,497,378
Common stock
issued in
January and
December 1995 in
connection with
stock option
exercises....... 10,968
Net loss........ (3,651,811)
-------------
Balances,
December 31,
1995............. 6,593,252
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SYMPHONIX DEVICES INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY, CONTINUED
FOR THE PERIOD FROM MAY 17, 1994
(DATE OF INCEPTION) TO DECEMBER 31, 1997
<TABLE>
<CAPTION>
DEFICIT
NOTES UNREALIZED ACCUMULATED
PREFERRED STOCK COMMON STOCK RECEIVABLE LOSSES ON ADDITIONAL CUMULATIVE DURING THE
---------------- ---------------- FROM DEFERRED SHORT-TERM PAID-IN TRANSLATION DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT STOCKHOLDERS COMPENSATION INVESTMENTS CAPITAL ADJUSTMENTS STAGE
--------- ------ --------- ------ ------------ ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
December 31,
1995............. 6,841,500 $6,842 1,980,142 $1,980 $ (14,800) $11,003,265 $ (4,404,035)
Series C
preferred stock
issued in June
1996 to
investors at
$5.35 per share,
net of issuance
costs of
$55,864......... 1,162,451 1,162 6,162,087
Series D
preferred stock
issued in
December 1996 to
investors at
$8.00 per share,
net of issuance
costs $5,865.... 440,680 441 3,519,134
Common stock
issued in
connection with
stock option
exercise in
exchange for
$70,750 in cash
and $124,400 of
notes receivable
from
stockholders,
net of
repurchase of
72,674 shares... 404,187 404 (124,400) 194,746
Net loss........ (6,108,556)
--------- ------ --------- ------ --------- ----------- ------------
Balances,
December 31,
1996............. 8,444,631 8,445 2,384,329 2,384 (139,200) 20,879,232 (10,512,591)
Series D
preferred stock
issued in June
1997 to
investors at
$8.00 per share,
net of issuance
costs $10,100... 750,000 750 5,989,150
Common stock
issued in
connection with
stock option
exercise in
exchange for
$33,913 in cash
and $359,999 of
notes receivable
from
stockholders.... 400,335 401 (359,999) 393,511
Deferred
compensation
related to grant
of stock
options......... $(2,264,287) 2,264,287
Amortization of
deferred
compensation.... 191,156
Unrealized
losses on short-
term
investments..... $(1,218)
Translation
adjustments..... $1,616
Net loss........ (7,991,052)
--------- ------ --------- ------ --------- ----------- ------- ----------- ------ ------------
Balances,
December 31,
1997............. 9,194,631 $9,195 2,784,664 $2,785 $(499,199) $(2,073,131) $(1,218) $29,526,180 $1,616 $(18,503,643)
========= ====== ========= ====== ========= =========== ======= =========== ====== ============
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balances,
December 31,
1995............. $ 6,593,252
Series C
preferred stock
issued in June
1996 to
investors at
$5.35 per share,
net of issuance
costs of
$55,864......... 6,163,249
Series D
preferred stock
issued in
December 1996 to
investors at
$8.00 per share,
net of issuance
costs $5,865.... 3,519,575
Common stock
issued in
connection with
stock option
exercise in
exchange for
$70,750 in cash
and $124,400 of
notes receivable
from
stockholders,
net of
repurchase of
72,674 shares... 70,750
Net loss........ (6,108,556)
-------------
Balances,
December 31,
1996............. 10,238,270
Series D
preferred stock
issued in June
1997 to
investors at
$8.00 per share,
net of issuance
costs $10,100... 5,989,900
Common stock
issued in
connection with
stock option
exercise in
exchange for
$33,913 in cash
and $359,999 of
notes receivable
from
stockholders.... 33,913
Deferred
compensation
related to grant
of stock
options......... --
Amortization of
deferred
compensation.... 191,156
Unrealized
losses on short-
term
investments..... (1,218)
Translation
adjustments..... 1,616
Net loss........ (7,991,052)
-------------
Balances,
December 31,
1997............. $ 8,462,585
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SYMPHONIX DEVICES INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM PERIOD FROM
MAY 17, MAY 17,
1994 (DATE 1994 (DATE
OF OF
INCEPTION) YEAR ENDED INCEPTION)
TO DECEMBER 31, TO
DECEMBER 31, -------------------------------------- DECEMBER 31,
1994 1995 1996 1997 1997
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $ (752,224) $ (3,651,811) $(6,108,556) $(7,991,052) $(18,503,643)
Adjustment to reconcile
net loss to net cash
used in operating
activities:
Amortization of
deferred
compensation......... -- -- -- 191,156 191,156
Depreciation and
amortization......... 17,523 198,891 420,814 497,939 1,135,167
Preferred and common
shares issued for
services............. 62,600 30,000 -- -- 92,600
Changes in operating
assets and
liabilities:
Prepaid expenses
and other current
assets............. (56,473) 2,376 (22,597) (374,415) (451,109)
Accounts payable... 24,483 44,313 (26,309) 323,903 366,390
Accrued
compensation....... 44,137 380,435 250,857 212,547 887,976
Other accrued
liabilities........ 141,338 (126,149) 99,813 661,515 776,517
------------ ------------ ----------- ----------- ------------
Net cash used in
operating
activities........ (518,616) (3,121,945) (5,385,978) (6,478,407) (15,504,946)
------------ ------------ ----------- ----------- ------------
Cash flows from
investing activities:
Purchases of short-term
investments............ (20,104,675) (12,784,507) (8,223,266) (10,007,214) (51,119,662)
Sales of short-term
investments............ 15,840,978 12,811,175 7,889,572 8,027,767 44,569,492
Purchases of property
and equipment.......... (294,492) (691,127) (408,720) (897,601) (2,291,940)
Change in other assets. (24,643) (34,041) 50,964 (68,435) (76,155)
------------ ------------ ----------- ----------- ------------
Net cash used in
investing
activities........ (4,582,832) (698,500) (691,450) (2,945,483) (8,918,265)
------------ ------------ ----------- ----------- ------------
Cash flows from
financing activities:
Proceeds from capital
leases................. 134,968 552,938 518,254 63,021 1,269,181
Payments on capital
lease obligations...... (2,970) (101,531) (221,443) (295,619) (621,563)
Proceeds from bank
borrowings............. -- -- -- 2,000,000 2,000,000
Payments received on
notes receivable from
stockholders........... 14,800 -- -- -- 14,800
Proceeds from issuance
of preferred stock, net
of issuance costs...... 5,242,911 5,635,908 9,682,824 5,989,900 26,551,543
Proceeds from issuance
of common stock........ 100 10,968 70,750 33,913 115,731
------------ ------------ ----------- ----------- ------------
Net cash provided
by financing
activities........ 5,389,809 6,098,283 10,050,385 7,791,215 29,329,692
------------ ------------ ----------- ----------- ------------
Net increase in cash and
cash equivalents........ 288,361 2,277,838 3,972,957 1,631,059 4,906,481
Effect of exchange rates
on cash and cash
equivalents............. -- -- -- 1,616 1,616
Cash and cash
equivalents, beginning
of period............... -- 288,361 2,566,199 6,539,156 --
------------ ------------ ----------- ----------- ------------
Cash and cash
equivalents, end of
period.................. $ 288,361 $ 2,566,199 $ 6,539,156 $ 4,908,097 $ 4,908,097
============ ============ =========== =========== ============
Supplemental disclosure
of cash flow
information:
Cash paid during the
period for interest.... $ -- $ 60,950 $ 86,113 $ 106,203 $ 253,266
============ ============ =========== =========== ============
Common stock issued in
exchange for promissory
note................... $ 29,600 $ -- $ 124,400 $ 359,999 $ 513,999
============ ============ =========== =========== ============
Preferred stock issued
in exchange for
services............... $ 24,000 $ 30,000 $ -- $ -- $ 54,000
============ ============ =========== =========== ============
Common stock issued in
exchange for services.. $ 38,600 $ -- $ -- $ -- $ 38,600
============ ============ =========== =========== ============
Unrealized losses on
short-term investments. $ -- $ -- $ -- $ (1,218) $ (1,218)
============ ============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY:
Symphonix Devices, Inc. and Subsidiary (a company in the development stage,
referred to hereafter as the "Company") was incorporated on May 17, 1994 to
develop and manufacture implantable and semi-implantable hearing devices.
Since its inception, the Company has been primarily engaged in developing its
initial product technology, raising capital and recruiting personnel.
In the course of its development activities, the Company has sustained
losses and expects such losses to continue through at least 1999. The Company
plans to continue its operations with proceeds from the sale of capital stock,
such as the initial public offering contemplated by the Prospectus, of which
these financial statements are a part, and with revenues from product sales.
If the offering contemplated herein is not consummated, the Company will have
to seek other sources of capital or adjust its operating plans.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated.
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.
Short-Term Investments:
All short-term investments are classified as available-for-sale and
therefore are carried at fair market value. Unrealized gains and losses on
such securities, when material, are reported as a separate component of
stockholders' equity. Realized gains and losses on sales of all such
securities are reported in earnings and computed using the specific
identification cost method.
Property and Equipment:
Property and equipment are stated at cost and are depreciated on a straight-
line basis over the shorter of the estimated useful lives of three to five
years or the length of the lease for leasehold improvements and assets
acquired under capital leases.
Research and Development:
Research and development costs are charged to operations as incurred.
Concentration of Credit Risk and Other Risks and Uncertainties:
The Company's cash, cash equivalents, and short-term investments are
primarily maintained at two financial institutions.
The Company's products require approvals from the Food and Drug
Administration and international regulatory agencies prior to commercialized
sales. There can be no assurance that the Company's products will receive any
of these required approvals. If the Company was denied such approval or such
approvals were delayed, it would have a materially adverse impact on the
Company.
F-8
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes:
The Company accounts for income taxes under the liability method, whereby
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary
to reduce deferred tax assets to the amounts expected to be realized.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Foreign currency translation:
The Company's international subsidiary uses its local currency as its
functional currency. Assets and liabilities are translated at exchange rates
in effect at the balance sheet date and income and expense accounts at average
exchange rates during the year. Resulting translation adjustments are recorded
directly to a separate component of stockholders' equity.
Computation of Historical Net Loss Per Common Share and Per Common Share-
Assuming Dilution:
The Company adopted Financial Accounting Standards Board No. 128 "Earnings
Per Share" and accordingly all prior periods have been restated. Net loss per
common share and per common share-assuming dilution, on an historical basis,
are computed using the weighted average number of shares of Common Stock
outstanding. Common equivalent shares from stock options and preferred stock
are excluded from the computation of net loss per common share-assuming
dilution as their effect is antidilutive. In February 1998, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 98, which addresses
the computation of earnings per share in an initial public offering. The
Company has determined that no incremental shares should be included in the
computation of earnings per share in accordance with the SAB.
Recent Accounting Pronouncements:
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity
of a business enterprise during a period, resulting from transactions and
other events and circumstances from nonowner sources. The impact of adopting
SFAS No. 130, which is effective for the Company in 1998, has not been
determined.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information". SFAS No. 131 requires publicly-held
companies to report financial and other information about key revenue-
producing segments of the entity for which such information is available and
is utilized by the chief operating decision maker. Specific information to be
reported for individual segments includes profit or loss, certain revenue and
expense items and total assets. A reconciliation of segment financial
information to amounts reported in the financial statements would be provided.
SFAS No. 131 is effective for the Company in 1998. The Company operates in one
business segment; namely, the design, manufacture, and sale of implantable and
semi-implantable hearing management devices.
F-9
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SHORT-TERM INVESTMENTS:
Marketable securities are deemed by management to be available-for-sale and
at December 31, 1996 and 1997 comprise:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------------------ ------------------------------
ACCRUED ESTIMATED ACCRUED ESTIMATED
COST BASIS INTEREST FAIR VALUE COST BASIS INTEREST FAIR VALUE
---------- -------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Municipal bonds......... $ 499,200 $ 8,229 $ 507,429 $ 499,938 $ 8,229 $ 508,307
Commercial paper........ 1,000,512 33,753 1,034,265 2,000,000 15,504 2,015,504
Medium term notes....... 1,999,496 27,324 2,026,820 3,005,665 21,196 3,026,057
U.S. Government agen-
cies................... 1,000,000 2,209 1,002,209 995,710 3,928 999,084
---------- ------- ---------- ---------- ------- ----------
$4,499,208 $71,515 $4,570,723 $6,501,313 $48,857 $6,548,952
========== ======= ========== ========== ======= ==========
</TABLE>
At December 31, 1996 and 1997, scheduled maturities for all of the
available-for-sale securities were less than one year. There were no realized
gains or losses recognized in 1996 and 1997.
4. PROPERTY AND EQUIPMENT:
Property and equipment include amounts for assets acquired under capital
leases of $1,206,160 and $1,201,775, with related accumulated amortization of
$510,734 and $882,148 at December 31, 1996 and 1997, respectively. Property
and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- -----------
<S> <C> <C>
Furniture and fixtures.............................. $ 123,598 $ 150,751
Machinery and equipment............................. 984,285 1,407,414
Leasehold improvements.............................. 223,426 625,456
Software............................................ 63,030 108,319
---------- -----------
1,394,339 2,291,940
Less accumulated depreciation and amortization...... (637,228) (1,135,167)
---------- -----------
$ 757,111 $ 1,156,773
========== ===========
</TABLE>
5. CAPITAL LEASE OBLIGATIONS:
Capital Leases:
The Company has capital lease obligations under seven lease lines that
expire between 1998 and 2001. Under the terms of these lease lines, the
Company is responsible for property taxes and insurance.
F-10
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1997, the future minimum payments under capital leases are
as follows:
<TABLE>
<S> <C>
1998............................................................... $389,721
1999............................................................... 255,856
2000............................................................... 97,162
2001............................................................... 8,305
--------
Minimum lease payments............................................. 751,044
Less amount representing interest.................................. 103,426
--------
Principal amount of minimum lease payments......................... 647,618
Less current portion............................................... 322,562
--------
$325,056
========
</TABLE>
6. BANK BORROWINGS
The Company has a Loan Agreement with a bank providing for borrowings of up
to $2,000,000 and the issuance of letters of credit up to $250,000. The
agreement provides a revolving line of credit through December 31, 1998 after
which the principal amount is repayable over four years. Borrowings under the
agreement bear interest at the bank's prime rate plus 0.75% (9.25% at December
31, 1997) and are secured by substantially all of the Company's assets. The
Company is required to maintain certain levels of cash and stockholders'
equity and to comply with certain other financial covenants.
At December 31, 1997, the Company had borrowings of $2,000,000 and an
outstanding letter of credit in the amount of $243,680 under the Loan
Agreement.
Future payments of principal under the Loan Agreement are as follows:
<TABLE>
<S> <C>
1998.......................................................... $ --
1999.......................................................... 500,000
2000.......................................................... 500,000
2001.......................................................... 500,000
2002.......................................................... 500,000
----------
$2,000,000
==========
</TABLE>
7. COMMITMENTS:
Operating Lease:
The Company rents its facilities under an operating lease which expires in
August 1998. Under the terms of the lease, the Company is responsible for
taxes, insurance and maintenance expenses. In October 1997, the Company
entered into a lease on a new facility for a five year period commencing in
January 1998 and ending in December 2002.
Future minimum lease payments under these operating leases as of December
31, 1997 are as follows:
<TABLE>
<S> <C>
1998.......................................................... $ 755,468
1999.......................................................... 655,950
2000.......................................................... 664,663
2001.......................................................... 634,704
2002.......................................................... 666,432
----------
$3,377,217
==========
</TABLE>
F-11
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rent expense for the periods ended December 31, 1995, 1996, 1997 and the
period from May 17, 1994 (date of inception) to December 31, 1997 was
$117,243, $118,344, $161,887 and $443,006, respectively.
8. STOCKHOLDERS' EQUITY:
Initial Public Offering
In November 1997, the Board of Directors authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission permitting the Company to sell its common stock in an initial
public offering.
Reverse Stock Split
In November 1997, the Company's Board of Directors approved a one-for-1.376
reverse stock split of the Company's common stock and a corresponding change
in the preferred stock conversion ratios. All common stock and per share
amounts in these financial statements have been adjusted retroactively to give
effect to the split. In addition, the Company's Board of Directors approved an
Amended and Restated Certificate of Incorporation which eliminates the
existing convertible preferred stock and changes the number of authorized
preferred stock to 5,000,000 shares, $0.001 par value, and increases the
shares of common stock authorized to 50,000,000 shares, which Certificate is
to be filed following the effectiveness of the initial public offering.
Convertible Preferred Stock:
At December 31, 1997, the amounts, terms and liquidation value of Series A,
Series B, Series C and Series D convertible preferred stock were:
<TABLE>
<CAPTION>
SHARES OF
COMMON
STOCK
SHARES RESERVED PREFERENTIAL
SHARES ISSUED AND FOR LIQUIDATION
SERIES AMOUNT AUTHORIZED OUTSTANDING CONVERSION VALUE
- ------ ----------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
A....................... $ 5,435,441 5,500,000 5,463,000 5,500,000 $ 5,463,000
B....................... 5,497,378 1,500,000 1,378,500 1,500,000 5,514,000
C....................... 6,163,249 1,500,000 1,162,451 1,500,000 6,219,113
D....................... 9,509,475 1,250,000 1,190,680 1,250,000 9,525,440
----------- --------- --------- --------- -----------
Balances, December 31,
1997................... $26,605,543 9,750,000 9,194,631 9,750,000 $26,721,553
=========== ========= ========= ========= ===========
</TABLE>
Under the Company's Certificate of Incorporation, the Company's preferred
stock is issuable in series and the Company's Board of Directors is authorized
to determine the rights, preferences and terms of each series.
Dividends:
The holders of Series A, Series B, Series C and Series D preferred stock are
entitled to receive dividends, out of any assets legally available, prior and
in preference to any declaration or payment of any dividend on the common
stock of the Company, at the rate of $0.10, $0.40, $0.535 and $0.80 per share
per year, respectively, or if greater (as determined on a per year basis and
on an as converted basis for the preferred stock), an amount equal to that
paid on any other outstanding shares of the Company. Such dividends are
payable when, as and if declared by the Board of Directors, and are not
cumulative. No dividends have been declared to date.
F-12
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Liquidation:
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series A, Series B, Series C
and Series D preferred stock are entitled to receive, prior and in preference
to any distribution of any of the assets or surplus funds of the Company to
the holders of common stock, an amount per share equal to the sum of $1.00,
$4.00, $5.35 and $8.00 respectively, for each outstanding Series A, Series B,
Series C and Series D preferred stock (as adjusted for any stock dividends,
combinations or splits) plus any declared but unpaid dividends on such shares.
If upon the occurrence of such event, the assets and funds distributed among
the holders of the preferred stock are insufficient to permit the payment to
such holders of the full aforesaid preferential amounts, then, the entire
assets and funds of the Company legally available for distribution are to be
distributed first ratably among the holders of the Series C and Series D
preferred stock in proportion to the full preferential amount each such holder
is otherwise entitled to receive. Then, such assets and funds shall be
distributed ratably among the holders of Series A and Series B preferred stock
in proportion to the full preferential amount each such holder is otherwise
entitled to receive.
After payment has been made to the holders of Series A, Series B, Series C
and Series D preferred stock, any remaining assets and funds are to be
distributed among the holders of common stock pro rata based on the number of
common stock held by each stockholder.
Mergers:
A merger, reorganization, or sale of all or substantially all of the assets
of the Company, in which the existing stockholders of the Company prior to the
transaction possess less than 50% of the voting power of the surviving entity
(or its parent) immediately after the transaction, shall be deemed to be a
liquidation, dissolution or winding up of the Company.
Voting:
Each share of preferred stock is entitled to voting rights equal to the
number of common shares into which each preferred share could be converted
into at the record date for a vote or consent of stockholders, except as
otherwise required by law, and has voting rights and powers equal to the
voting rights and powers of the common stock.
Conversion and Registration:
Each share of preferred stock, at the option of the holder, is convertible
into the number of fully paid and nonassessable shares of common stock which
results from dividing the conversion price per share in effect for the
preferred stock at the time of conversion into the per share conversion value
of such stock. The initial conversion price per share and initial per share
conversion value of Series A, Series B, Series C and Series D preferred stock
is $1.38, $5.50, $7.36 and $11.01, respectively. The initial conversion price
of Series A, Series B, Series C and Series D preferred stock is subject to
adjustment from time to time, as described in the Company's Certificate of
Incorporation.
In the event of a conversion of the Series C preferred stock in connection
with this initial public offering at a price lower than $11.70 per share of
common stock, then the Conversion Price for the Series C preferred stock shall
be reduced to $6.90. In the event of a conversion of the Series D preferred
stock in connection with this initial public offering at a price lower than
$11.00 per share of common stock, then the Conversion Price for the Series D
preferred stock shall be reduced to the initial public offering price.
F-13
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Conversion is automatic at the then effective conversion rate immediately
upon the closing of a firm commitment underwritten public offering pursuant to
an effective registration statement under the Securities Act of 1933 covering
the offer and sale of common stock in which the public offering price equals
or exceeds $10.00 per share (adjusted to reflect subsequent share dividends,
share splits or recapitalization) and the aggregate proceeds raised equals or
exceeds $17,000,000. The Company has reserved 9,750,000 shares of common stock
upon conversion of the preferred stock as of December 31, 1997).
Negotiation Rights:
In connection with the Series D preferred stock issuances, the Company
granted one of the investors first negotiation rights, whereby the Company
agreed not to (i) transfer, dispose of, sell, lease or license to any third
party certain defined intellectual property rights that are or may be used or
may have application in the field of implantable or semi-implantable hearing
aid devices or (ii) transfer or dispose of all or substantially all of the
assets or voting securities of the Company to any third party until it
provides that investor the opportunity to consummate a similar transaction.
The first negotiation rights survive from a period of 18 months from the date
of the Series D preferred stock agreement or 12 months from the effective date
of the Company's initial public offering, whichever first occurs. However, the
first negotiation rights will terminate if the investor, either directly or
through an affiliate, does not participate as an investor in the Company's
initial public offering.
Warrants:
The Company has issued warrants in connection with obtaining its equipment
lease line of credit.
The Company issued to the leasing company warrants to purchase up to 37,000
of the Company's Series A preferred stock at $1.00 per share and up to 9,250
of the Company's Series B preferred stock at $4.00 per share. The warrants to
purchase the Company's Series A and Series B preferred stock are exercisable
until October 2004.
Common Stock:
The Company has 2,784,664 shares of its common stock outstanding at December
31, 1997. Such shares of common stock were issued to the founders and other
key persons under purchase agreements. Under these agreements, any unvested
shares are subject to repurchase by the Company for a period of 90 days after
termination of services to the Company. Shares generally vest 1/48 per month
at the end of each full month. At December 31, 1997, approximately 632,194
shares of common stock are subject to repurchase.
Notes Receivable:
In 1994, 1996 and 1997, the Company issued 1,075,581, 207,122 and 337,809
shares, respectively, of its common stock to one of the founders and other key
persons in exchange for promissory notes of $29,600, $124,400 and $359,999,
respectively. The 1994 promissory notes bear annual interest of 5.36%, payable
in the year 1999. A principal payment of $14,800 was made in 1994. The 1996
and 1997 promissory notes bear annual interest ranging from 6.36% to 6.84%,
payable in the years 2001 and 2002. The related shares are pledged as
collateral for the notes.
F-14
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in November 1997. A total of 75,000 shares
of common stock are reserved for issuance under the Purchase Plan. The
Purchase Plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed 10% of an employee's compensation. No
employee may purchase more than $25,000 worth of common stock in any calendar
year. The price of shares purchased under the Purchase Plan is 85% of the
price of the fair market value of the common stock at the beginning of the
offering period or the specified purchase date. The Purchase Plan will become
effective upon the closing of the Company's initial public offering.
1994 Stock Option Plan:
The 1994 Stock Option Plan (the "1994 Plan") provides for grants of
incentive stock options to employees (including officers and employee
directors) and nonstatutory stock options to employees (including officers and
employee directors) and consultants of the Company. The 1994 Plan is
administered by a committee appointed by the Board of Directors which
identifies optionees and determines the terms of options granted, including
the exercise price, number of shares subject to the option and the
exercisability thereof.
The terms of options granted under the 1994 Plan generally may not exceed
ten years. The term of all incentive stock options granted to an optionee who,
at the time of grant, owns stock representing more than 10% of the voting
power of all classes of stock of the Company or a parent or subsidiary of the
Company (a "Ten Percent Stockholder"), may not exceed five years, however.
Generally, options granted under the 1994 Plan vest and become exercisable
starting one year after the date of grant, with 25% of the shares subject to
the option becoming exercisable at that time and an additional 1/48th of such
shares becoming exercisable each month thereafter. Holders of options granted
under the 1994 Plan may exercise their unvested options prior to complete
vesting of shares, subject to such holder's entering a restricted stock
purchase agreement granting the Company an option to repurchase, in the event
of a termination of the optionee's employment or consulting relationship, any
unvested shares at a price per share equal to the original exercise price per
share for the option. The exercise price of incentive stock options granted
under the 1994 Plan must be at least equal to the fair market value of the
shares on the date of grant. The exercise price of nonstatutory stock options
granted under the 1994 Plan is determined by the Board of Directors. The
exercise price of any incentive stock option granted to a Ten Percent
Stockholder must equal at least 110% of the fair market value of the common
stock on the date of grant.
F-15
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Activity under the 1994 Plan is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------------------
SHARES NUMBER
AVAILABLE OF EXERCISE AGGREGATE
FOR GRANT SHARES PRICE PRICE
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Options reserved for 1994 Plan at
inception........................... 970,203
Options granted.................... (439,676) 439,676 $0.14 $ 61,555
Options exercised.................. (145,348) $0.14 (20,349)
-------- -------- --------
Balance, December 31, 1994........... 530,527 294,328 $0.14 41,206
Options granted.................... (486,903) 486,903 $0.14-$0.55 144,890
Options exercised.................. (79,712) $0.14 (11,160)
-------- -------- --------
Balance, December 31, 1995........... 43,624 701,519 $0.14-$0.55 174,936
Additional options reserved........ 654,070
Options granted.................... (571,616) 571,616 $0.55-$0.83 419,938
Options exercised.................. (476,861) $0.14-$0.83 (195,796)
Options canceled................... 211,592 (211,592) $0.14-$0.55 (59,717)
Repurchase of common shares........ 72,674
-------- -------- --------
Balance, December 31, 1996........... 410,344 584,682 $0.14-$0.83 339,361
Additional options reserved........ 375,000
Options granted.................... (395,680) 395,680 $1.10-$8.81 802,780
Options exercised.................. (400,336) $0.14-$2.20 (394,294)
Options canceled................... 13,495 (13,495) $0.14-$1.10 (7,338)
-------- -------- --------
Balance, December 31, 1997........... 403,159 566,531 $0.14-$8.81 $740,509
======== ======== ========
</TABLE>
For the years ended December 31, 1996 and 1997, the weighted average fair
value of options granted was $0.70 and $2.03 per share, respectively.
The difference between the exercise price and the deemed fair market value
of the Company's common stock at the date of issue of certain stock options,
totaling $2,264,287, has been recorded as deferred compensation as a component
of stockholders' equity. Of this amount, $191,156 has been recognized as an
expense through December 31, 1997. The remaining $2,073,131 will be recognized
as an expense as the shares and options vest over a period of up to four
years.
The options outstanding and currently exercisable by exercise price at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
OPTIONS CURRENTLY
OPTIONS OUTSTANDING EXERCISABLE
- ------------------------------------------------------- --------------------------
WEIGHTED AVERAGE WEIGHTED
EXERCISE NUMBER REMAINING WEIGHTED AVERAGE NUMBER AVERAGE
PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- -------- ----------- ---------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.14 132,177 6.99 $0.14 89,553 $0.14
$0.55 42,229 7.93 $0.55 12,270 $0.55
$0.73 85,974 8.59 $0.73 70,683 $0.73
$0.83 15,793 8.74 $0.83 5,528 $0.83
$1.10 145,445 9.40 $1.10 6,260 $1.10
$2.20 123,111 9.76 $2.20 30,851 $2.20
$8.81 21,802 9.92 $8.81 -- $8.81
------- -------
566,531 8.66 $1.30 215,145 $0.59
======= =======
</TABLE>
F-16
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1996, options to purchase 266,989 shares were exercisable
at an average weighted exercise price of $0.62 per share.
The Company has elected to continue to follow the provisions of APB No. 25,
"Accounting for Stock Issued to Employees," for financial reporting purposes
and has adopted the disclosure-only provisions of SFAS No. 123 ("SFAS No.
123"). Had compensation cost for the Company's stock option plans been
determined based on the fair market value at the grant date for awards in
1995, 1996 and 1997 consistent with the provisions of SFAS No. 123, the
Company's net loss and net loss per common share and per common share-assuming
dilution for 1995, 1996 and 1997 would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net loss--as reported...................... $3,651,811 $6,108,556 $7,991,052
========== ========== ==========
Net loss--pro forma........................ $3,656,311 $6,126,556 $8,032,052
========== ========== ==========
Net loss per common share and per common
share-assuming dilution--as reported...... $ 1.86 $ 2.79 $ 3.10
========== ========== ==========
Net loss per common share and per common
share--assuming dilution--pro forma....... $ 1.86 $ 2.80 $ 3.11
========== ========== ==========
</TABLE>
The above pro forma disclosures are not necessarily representative of the
effects on reported net income or loss for future years.
In accordance with the provisions of SFAS No. 123, the fair value of each
option is estimated using the following assumptions used for grants during
1995, 1996 and 1997; dividend yield and volatility of 0% for all periods,
weighted risk-free interest rates of 6.6%, 5.8% and 6.0% at the date of grant
and expected terms of 5.0, 5.4 and 5.0 years, respectively.
9. INCOME TAXES:
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1996 and 1997 are
presented below:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Depreciation....................................... $ 103,164 $ 153,302
Capitalized start-up costs......................... 735,047 1,401,733
Net operating loss carryforward.................... 3,293,903 5,240,902
Research and development credits................... 445,933 1,016,400
Other.............................................. 35,991 51,223
Valuation allowance................................ (4,614,038) (7,863,560)
---------- ----------
$ -- $ --
========== ==========
</TABLE>
Due to the uncertainties surrounding the realization of deferred tax assets,
the Company has provided a full valuation allowance and, therefore, no benefit
has been recognized for the net operating loss and other deferred tax assets.
At December 31, 1997, the Company has $13,171,517 for federal and
$13,080,375 for state net operating loss carryforwards which expire from 2009
through 2012 and 1999 through 2002, respectively, if not utilized.
F-17
<PAGE>
SYMPHONIX DEVICES, INC. AND SUBSIDIARY
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. In the event the Company has had a change in
ownership, utilization of the carryforwards could be restricted.
10. EMPLOYEE BENEFIT PLAN:
During 1996, the Company established a Retirement Savings and Investment
Plan (the "Plan") under which employees may defer a portion of their salary up
to the maximum allowed under IRS rules. The Company has the discretion to make
contributions to the Plan. As of December 31, 1997, no Company contributions
have been made to the Plan.
11. UNAUDITED PRO FORMA INFORMATION:
Upon the closing of the Company's initial public offering, all outstanding
preferred stock will be converted automatically into common stock. The pro
forma effect of the conversion has been presented as a separate column in the
Company's balance sheet, assuming the conversion had occurred as of December
31, 1997.
Pro forma net loss per common share and per common share--assuming dilution
has been presented to depict what the net loss per common share and per common
share--assuming dilution would have been had the common stock issuable upon
the conversion of the outstanding preferred stock been outstanding during such
periods.
12. RELATED PARTY TRANSACTIONS:
In February 1997, the stockholders approved the assignment of technology
relating to and including two patent applications to VibRx in consideration
for repayment of approximately $10,000 of related patent expenses and issuance
of common stock equal to 20% of all VibRx's outstanding shares at such time as
VibRx completes an initial financing with aggregate proceeds of at least
$500,000. VibRx was formed and is controlled by the Company's President and
Chief Executive Officer.
13. SUBSEQUENT EVENTS
In January 1998, the Company reincorporated in Delaware. Under the
reincorporation, each class and series of shares of the predecessor company
was exchanged for one share of identical class and series of stock of the
Delaware successor company having a par value of $0.001 per share for both
common stock and preferred stock. The accompanying consolidated financial
statements have been adjusted retroactively to give effect to the
reincorporation.
F-18
<PAGE>
The Company's implantable
hearing devices have not
been approved for marketing
by the United States Food
and Drug Administration or
any international regula-
tory authorities.
[ILLUSTRATION OF LASER DOPPLER VIBROMETRY]
Laser Doppler Vibrometry is used to map the movement of the ear's vibratory
structures for optimization of transducer design and performance.
[PICTURE OF FLOATING MASS TRANSDUCER]
Leveraging the Company's core FMT technology
[Symphonix Logo Appears Here]
Selective signal processing and FMT modification are designed to allow for
management of different types of hearing impairments.
[ILLUSTRATION OF AUDIOGRAM]
The Vibrant HF soundbridge is under development and designed to provide
hearing management for users with noise induced hearing loss at high
frequencies but relatively normal hearing at lower frequencies.
<PAGE>
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No dealer, sales person, or other person has been authorized to give any
information or to make any representations not contained in this Prospectus
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company or any of the Underwriters or by
any other person. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy a security other than the shares of Common
Stock offered hereby, nor does it constitute an offer to sell or solicitation
of an offer to buy any of the securities offered hereby, to any person in any
jurisdiction in which it is unlawful to make such offer or solicitation to
such person. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create any implication that
information contained herein is correct as of any date subsequent to the date
hereof.
--------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Special Note Regarding Forward-Looking Statements......................... 17
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 20
Selected Financial Information............................................ 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 25
Management................................................................ 48
Certain Transactions...................................................... 55
Principal Stockholders.................................................... 57
Description of Capital Stock.............................................. 59
Shares Eligible for Future Sale........................................... 62
Underwriting.............................................................. 64
Legal Matters............................................................. 66
Experts................................................................... 66
Additional Information.................................................... 66
Index to Consolidated Financial Statements................................ F-1
</TABLE>
--------------------
Until March 10, 1998 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery is in addition to the obligation of dealers to deliver a
Prospectus when acting as Underwriters and with respect to their unsold
allotments or subscriptions.
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2,300,000 Shares
[LOGO OF SYMPHONIX]
Common Stock
--------------------
PROSPECTUS
--------------------
COWEN & COMPANY
UBS SECURITIES
February 13, 1998
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